Kate Stoupas/ Getty Images; Illustration by Austin Courregé/Bankrate
Key takeaways
- Title insurance offers protection from problems with a property’s title, including liens, ownership disputes and encroachments.
- There are two types: a mandatory lender’s policy, whose cost is based on the mortgage amount, and an optional owner’s policy, whose cost is based on the home’s price.
- The cost is a one-time upfront charge, but the insurance lasts throughout your ownership of the home.
For many people, a home is the biggest thing they’ll ever buy. The last thing anyone wants is to encounter unexpected ownership issues after completing the purchase. This is where title insurance comes in: These policies safeguard both mortgage lenders and homebuyers against potential problems with a property’s deed following the transfer of ownership. Here’s a closer look at what title insurance is, and what it means for homeowners.
What is title insurance?
The title of a property refers to the legal rights the owner holds to the property. When purchasing a home, it’s crucial to ensure the property has a clear title and is free from liens or other ownership claims. Failing to do so could leave the new owner responsible for resolving these issues, possibly even compromising their legal right to the home. Fortunately, if they encounter these problems, title insurance can help cover both legal expenses and potential losses — it’s protection against potential homeownership issues.
Types of title insurance
There are two varieties of title insurance, both paid as an upfront charge when you buy a home: a lender’s policy and an owner’s policy.
Lender’s title insurance
- Protects the lender from liability, usually for the life of the mortgage
- Typically required
- Cost is based on size of loan
- Doesn’t protect the buyer from future title disputes
When securing a mortgage, lenders require borrowers to obtain a lender’s title insurance policy, also known as a loan policy. This protects the lender in the event of property ownership claims. Often, the lender recommends a title insurance company for you and includes their fee on your loan estimate (but just because they recommend a company does not mean you have to use it — you’re free to shop around). This lump-sum premium is typically paid at closing as part of the standard closing costs.
Owner’s title insurance
- Protects the buyer from liability
- Usually optional
- Cost is based on home purchase price
- Helps cover costs of any future title disputes
Owner’s title insurance is an optional separate policy serving to shield the buyer from any ownership claims. It’s typically purchased at the same time as the lender’s insurance, but definitely by the time you take possession of the home.
How it works and what it covers
Obtaining title insurance typically involves two stages: First, a title search is run to verify that the home seller holds legitimate ownership of the property and has the right to sell it. Next, the title company evaluates any identified issues and provides a quote for a policy based on the associated risks. If numerous problems are found, the company may opt not to offer a policy at all.
Once in place, title insurance protects against defects in a property’s title. These may include:
- Liens from contractors who worked on the property but were not fully compensated
- Unpaid homeowner’s association dues or other outstanding debts
- Ownership disputes, such as claims from unknown heirs
- Encroachments
- Falsified or forged documents and other fraud-related issues
For instance, say you purchase a property from the estate of a deceased individual, and the title search did not reveal any issues — but later, an unknown heir steps forward to claim ownership, alleging that it was improperly sold to you. Title insurance can be invaluable in a case like this, helping to cover the expenses associated with resolving the heir’s claim.
How much does title insurance cost?
Title insurance costs
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- Title insurance policies typically cost a median of 0.67 percent of the property’s sale price, according to data from Fannie Mae. The median cost in dollars is $1,901.
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- The total costs of a title insurance premium, settlement expenses and ongoing costs of an annual mortgage insurance premium (if applicable) equate to less than 1 percent of a borrower’s overall life-of-loan expenses, according to First American, a leading title underwriter.
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- Despite climbing home prices, the cost of title insurance has decreased by 7.8 percent across the country since 2004, according to the American Land Title Association (ALTA).
What can you expect to pay for title insurance? Let’s use as an example a home that sold for $400,000, which is close to the national median home price according to National Association of Realtors data. If the median cost of title insurance is 0.67 percent of the purchase price, per the Fannie Mae info above, that comes to a total of $2,680.
This said, costs can range depending on where you’re buying. Some states regulate title insurance prices, but others allow a free market; shopping around is always useful but it’s especially important if that’s the case.
How to buy title insurance
While your lender or real estate agent may suggest a specific title company, you aren’t required to use it — nor are you obligated to use the same company that conducted the title search. You have the option to shop around and get a policy from a company of your choice.
It’s important to choose a reputable and established company that you can rely on for years to come. When evaluating different providers, don’t hesitate to inquire about any past claims they’ve handled and whether they have adequate insurance coverage for their business. Ask about any potential discounts you may qualify for, too.
Is title insurance worth it?
Title insurance policies protect both you and the lender against legal disputes and liens regarding property ownership. If you’re financing your home purchase, whether it’s worth it or not is a moot point: Most mortgage lenders require it.
However, remember that the lender’s policy only protects the lender. An owner’s policy is not mandatory, but it’s still probably a good idea. It’s a one-time charge, so you only pay once, but the protection lasts for as long as you own the home. If you don’t have owner’s title insurance and an issue turns up in the future, you’ll likely be responsible for correcting it, which can be costly. For example, if the previous owner had unpaid property taxes, a lien might be placed on the property, which can’t be removed until the back taxes are paid.
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