Title insurance serves an important purpose in a real estate transaction: It protects buyers and mortgage lenders from financial losses that arise from defects or disputes not caught before the transfer of property ownership.
When a buyer and seller enter a contract of sale for a property, they select a title agent to initiate a search in the local jurisdiction’s land records for any encumbrances, liens, claims, or conflicts that need to be cleared prior to the transfer of the property from one party to the other.
But as an additional measure of protection, buyers can elect to purchase title insurance from a reputable insurer.
Why do you need it?
An owner’s title insurance policy is optional, but if you mortgage the property, most of the time lenders require you to also purchase a title insurance policy to protect the lenders’ own interest and liability. While title agents and insurers are usually heavily regulated, mistakes and foul play can occur, and there are large financial ramifications for property owners when it does.
Sometimes, deeds or deeds of trust releases are fraudulent, lost, or incorrectly filed, and title insurance protects you if this is caught after buying a home or other piece of property, according to the National Association of Insurance Commissioners (NAIC), an industry trade group. There may be an encroachment on the property, such as a neighbor’s shed or fence, that needs to be removed or addressed before you could sell, or tax or mechanics’ liens attached to the property by previous owners. If those are not remedied through the title search process before closing, the financial liability of fixing those issues could fall on you, according to the Consumer Financial Protection Bureau.
What does title insurance cover?
In the event you had to make a claim, a title insurance policy would pay for damages and costs associated with fixing the issue, according to the National Association of Insurance Commissioners’ Center for Insurance Policy and Research. The NAIC has a Title Insurance Task Force that studies title insurer issues, including assisting regulatory bodies to battle fraudulent and unethical activities.
The amount of the policy for the lender is usually equal to the amount being financed.
The lender’s policy value decreases as time goes on and the mortgage amount is paid down, and ends coverage when it is paid off, while the owner’s policy is in effect as long as the owner retains interest in the property.
It’s important to note the policy only covers defects that occur prior to the transfer to you, and not anything that happens after you own it.
What does title insurance cost?
The actual cost of the title insurance policy varies by state, property values, and loan amounts, but averages about $1,000 for property owners, according to the National Association of Realtors. The regulating body for insurance providers in each state can provide more information on premium costs. States such as Florida and Texas have fixed premium prices, no matter your situation, while others, such as Maryland, allow you to shop around for a title insurance company. Your title agent may have recommendations to assist in your choice. This calculator can help you estimate title insurance costs in your area based on the sales price.
Lenders usually expect the buyer to pay for their title insurance as well as the buyer’s own. The estimated costs should be disclosed in a Closing Disclosure or Good Faith Estimate, but they may change slightly based on the terms of the deal by closing time.The lender’s policy is usually much less, as their covered amount goes down over time as the mortgage is paid off.
Your title insurance premium price may include fees or optional services that you can negotiate lower or out of the price altogether.
Who pays for title insurance?
It is customarily the buyer’s responsibility to pay for both their own and their lender’s policy. However, you can negotiate that the seller pays for these and other costs as part of your purchase negotiation process.
What to do after you purchase the property
To give you peace of mind and ensure the title process is working as it should, call your county’s land records office or look at their online database to make sure the deed and any applicable deeds of trust, covenants, and/or easements were recorded.
Keep a copy of your title policy and your closing statement documents in a safe place until you sell or transfer the property to another buyer.