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So What Is Title Insurance?
Buying a home comes with many legal and financial responsibilities. When you purchase a home, you take legal possession of the property and finance a loan through a mortgage lender, unless it's a cash sale. By agreeing to finance the loan, the lender assumes big financial risks on their investment. To protect against financial loss during the loan period, the lender requires the buyer to purchase title insurance on the property.
What is Title Insurance?
When you buy a home, you establish legal ownership by "taking title" to the property. A title insurance policy protects you, as well as your lender, against any financial loss that may arise from disputes on the property, such as:
- Property liens for unpaid debts and property taxes
- Easements or encumbrances
- Disputes over wills between heirs
- Fraudulent property claims
- Forged signatures on documents
- Clerical errors in courthouse documents
When you apply for a mortgage loan, the lender will require a title search on the property before closing the deal through escrow. The title company will search for public records like deeds, mortgages, tax records, court judgments, divorce decrees, and child support orders that may affect the buyer's or lender's property rights. A title insurance policy covers third-party claims that do not show up in the title search.
Title Insurance Policies
There are two types of title insurance policies: lender's insurance and owner's insurance.
Lender's Title Insurance
Lender's title insurance is required to get a mortgage loan because it protects the lender against financial losses. It ensures that the lender has first claims on the property above all other types of claims if problems arise. A lender's title insurance policy is required when purchasing or refinancing a home.
Owner's Title Insurance
Owner's title insurance protects the buyer, and it's optional, not required. Owner's title insurance can protect a homeowner's equity in the property and protect his/her rights to live in the home if a claim arises after purchase. Common problems that often arise with owner's title insurance include:
- Property deed errors
- Property survey errors
- Boundary disputes
- Building code violations by a previous owner
- Unpaid child support by a previous owner
- Fraudulent claims by an ex-spouse
While owner's title insurance may seem like a waste of money to some homebuyers, it can protect against title problems that arise following the sale.
How Much Does Title Insurance Cost?
Title insurance is a one-time, up-front fee – not an ongoing expense. A lender's policy is based on the loan amount, while an owner's policy is based on the home's purchase price. According to the American Land Title Association (ALTA), both policies combined usually cost from 0.5% to 1.0% of the home's purchase price, typically about $1,500 to $3,000.
Most mortgage lenders work with preferred title companies that handle their properties, and most buyers use the lender's recommendation to expedite the sale. However, that doesn't mean that buyers can't shop around if they want to put in the time and effort. According to the Consumer Financial Protection Bureau, buyers may save up to $500 by shopping around for price comparisons in title insurance.
To find a title insurance company in your area, you can conduct an online search of the ALTA Registry for listings in your state. Before you make a choice, make sure the company has strong financial ratings and a good financial reputation. Major companies that handle title insurance policies include Fidelity, First American, Old Republic, and Stewart.
If you're buying or refinancing a home, your mortgage lender will require a title insurance policy prior to closing, but you can also purchase owner's title insurance for further protection.
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