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There are many different types of homeowners insurance that are necessary to protect a property. Title insurance falls broadly within this category, but what is title insurance? This guide will explain what a title insurance policy is, when it is necessary, and what protection it provides.
What is title insurance?
To answer the question, "What is title insurance?" it's essential to know what title is. Title refers to legal ownership of a property. So title insurance protects against competing claims of ownership.
For example, if a homeowner finds out after purchasing a property that there's a lien on it, the homeowner might have to pay off the person with the lien. This could cause serious financial loss that is not covered by standard home insurance. A title insurance policy will protect the homeowner from this loss.
How does title insurance work?
When a property changes hands or someone secures a mortgage, a title insurance policy usually must be purchased.
The first step is for a title agency to conduct a search. The purpose is to determine if there are any competing ownership claims and to make sure the owner has valid legal title to the property. The title search looks for unpaid back taxes; evidence of inconsistent ownership such as a conflicting will, or undocumented easements. An easement gives someone else the right to use part of the property.
Sometimes, things are missed on a title search. Title insurance protects against this. Homeowners who secure a mortgage are usually required by their mortgage provider to purchase lender's title insurance. That protects the lender if issues arise, since the home serves as collateral for the loan. Owners may also choose to buy owner's title insurance to protect their own interest.
If an undiscovered title problem arises, title insurance will cover losses. It could pay off back taxes, for example.
What does title insurance cover?
Title insurance covers any undiscovered problems with a property's title. This could include:
- Forged title
- Title filing errors
- Back taxes
- Competing ownership claims due to inconsistent or conflicting wills
- Unknown heirs to the property who come forward to claim ownership
- Undiscovered easements, such as driveway access for rear neighbors
- Liens, which could occur due to unpaid HELOCs, unpaid HOA fees, or unpaid contractor fees.
Title search issues
The purpose of a title insurance policy is to insure against title search issues. Title agents search public records to see if there is a clean title. But things can be missed. For example, unknown heirs often wouldn't be discovered. Forged titles may not be discovered either.
These undiscovered issues could affect a person's claim on the property. A homeowner who bought a home from someone who didn't really own it could be out hundreds of thousands of dollars. A title insurance policy covers those losses.
Who needs title insurance?
Do you need title insurance? Figuring out coverage needed for your home can be complicated.
In general, however, most homeowners require an owner's title insurance policy to protect their financial interests. Without this protection, an undiscovered title issue could be disastrous. Lender's title insurance is also typically required before a mortgage provider will issue a loan.
Types of title insurance policies
Owner's title insurance
Owner's title insurance isn't usually required. But it is recommended. Without it, if there is an undiscovered issue with the legal ownership of the property, the homeowner would be on their own to deal with the financial consequences. An owner's title insurance provides relatively affordable protection against such a calamity.
Lender's title insurance
Lenders title insurance is usually required by mortgage loan providers. It is added into closing costs. It protects lenders in case of an undiscovered title issue. Lenders need this protection because the home serves as collateral. If it turned out that a homeowner who borrowed for a home didn't actually take legal ownership because of a forged title or other issues, the lender might otherwise be out the loan amount if the homeowner stopped paying the loan.
Average cost of title insurance coverage
Average homeowners insurance costs can vary, so it is important for homeowners to research the question, "How much is title insurance?" Title insurance costs vary by provider and state. They are often between $500 and $3,500 per policy.
It is important to get a title insurance quote from several lenders before purchasing a title insurance policy.
Who pays for title insurance?
In general, homebuyers pay for lender's title insurance. In most parts of the country, sellers pay for owner's title insurance as part of the negotiation of an offer. But this is not always the case, and owners may pay for this protection on their own.
How to get a title insurance policy
When buying a home insurance policy, it is generally not possible to add title insurance to standard homeowners coverage. Instead, standalone title insurance usually must be purchased through a title company. The company conducts a title search and then facilitates the purchase of title insurance.
Title insurance companies
When deciding where to buy title insurance, be sure to research title insurance companies. Look for one that has a solid reputation. A large number of completed transactions and favorable reviews can also be helpful to ensure the company is reliable.
FAQs
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Buying owner's title insurance on a new home can be a good idea. There could still be issues such as a disputed claim of ownership of the land, undisclosed easements, or contractors liens.
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Title insurance only covers problems with a home title. It doesn't cover any other problems with the home, such as damage to the structure or the personal possessions kept inside of the property.
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Title insurance is in effect as long as the property owner who purchased the policy (or their heirs) owns the insured property.
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Waiting until after closing to buy a title insurance policy is possible for owner's title insurance. That's because it's not necessarily required. However, any problems that arise before the title insurance is in effect will not be covered. Lenders title insurance usually must be purchased before closing because lenders require it as a condition of issuing the loan.
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Title insurance is usually worth the cost. A property owner could face hundreds of thousands of dollars in losses if there is a dispute over ownership of a purchased property. Owner's title insurance protects against these losses. Also, lenders generally require a buyer to purchase title insurance.
Our Insurance Expert
Christy Bieber is a full-time personal finance and legal writer with more than a decade of experience. She has a JD from UCLA as well as a degree in English, Media and Communications with a Certificate in Business Management from the University of Rochester. In addition to writing for The Ascent and The Motley Fool, her work has also been featured regularly on MSN Money, CNBC, and USA Today. She also ghost writes textbooks, serves as a subject matter expert for online course design, and is a former college instructor.
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