What Is Title Insurance And How Does It Work?
When you buy a house, you’ll almost always have to pay a handful of closing costs, with title insurance being a common one. While it might sound like just another fee you have to pay, title insurance is a vital part of the closing process. To prevent potential legal costs that might come up if you have issues with the title to your property, title insurance is a must.
So, what is title insurance and how exactly does it work? Let’s take a look at how this form of insurance can protect you during and after the home buying process.
What Is Title Insurance?
Before we can discuss what title insurance protects, let’s talk about what a title is. Title is a concept that establishes who legally owns a property – and who might have a claim to it. When you buy a home, the title will likely transfer to you, or you might share it with another person, like a spouse. Before the transfer of title, most lenders require that you have a title search done to find out if there are any issues.
There can be many problems with the title history of a home, including debts incurred by previous owners that you could become responsible for if you don’t do a search, such as unpaid homeowners association (HOA) fees or unpaid property taxes. If a previous owner’s heir still has a claim on the home’s title, this could be a serious issue as well. In fact, you could lose your home if the heir can prove they should be the rightful owner.
Title insurance is meant to protect you from issues that might arise after the title search is done. If anything comes up that isn’t found in a search of public records , title insurance can help resolve those claims made against your home after property ownership is transferred.
How Title Insurance Works: A Step-By-Step Process
While a clear or “clean” title (one without any encumbrances, liens or other title defects on it) is necessary in order to purchase a property, sometimes things can slip through the cracks and cause issues. Title insurance exists to make sure you’re covered if that happens.
When you purchase title insurance, the process will typically be as follows:
- When getting a mortgage, the buyer or their attorney will go through a title agency to first do a title search and make sure the home’s title is clear. This will help the title company make sure that the seller can legally transfer ownership of the property to you.
- A person or party from the title company known as the abstractor will perform the title search. Typically, the abstractor will sift through public records, legal documents and any other potentially relevant information to determine whether there are any outstanding issues with the legal ownership of the home.
- A title search might uncover a lot of things, from outstanding debts like unpaid HOA fees and property taxes to easements or liens placed against the house. The title company will attempt to resolve any outstanding issues behind the scenes, unless there’s a problem preventing the sale of the home from proceeding.
- Once the title is clear, as far as the title agency can see, ownership of the property can be transferred to you. There is still potential for future issues, however. While they are typically able to find and resolve most problems, there are some defects a title agency may not be able to detect for various reasons – such as forged documents, deeds affecting missing or deceased persons, etc. These are issues you may want the protection of title insurance to cover, just in case.
- After the title search, your lender will charge you for lender’s title insurance, which protects them in the event of arising issues that might impact ownership rights. To protect yourself from potential hazards and lawsuits related to your home’s title, you can also purchase an optional owner’s policy. Whether you purchase an owner’s policy or just lender’s title insurance, it will be rolled into your closing costs.
What Does Title Insurance Cover?
Title insurance covers any underlying issues with your home’s title that a title agency may have missed. If there is an outstanding debt associated with your home (such as unpaid property taxes or even a mortgage loan) and the title company missed it, the party owed money can file a title claim against you and demand you repay that debt as the owner of the property.
If you have title insurance, however, you can file a title insurance claim and your insurer will attempt to work out and potentially cover the costs of whatever is wrong. Other issues that a title insurer may cover include:
Types Of Title Insurance Policies
The two main forms of title insurance policies are owner’s and lender’s title insurance. The homeowner is often responsible for paying both insurance policies, though they may not even realize, as they are often rolled into closing costs.
Let’s go over what both of these policies cover to help you decide what amount of coverage is right for you.
Lender’s Title Insurance
Lender’s title insurance, which you will likely pay for as part of your mortgage closing costs, protects your lender from claims against your property that could negatively impact them. In general, you as the homeowner will be the first person responsible for claims against your property – so if you also want protection against potential legal issues that could arise, you’ll need to purchase owner’s title insurance.
Owner’s Title Insurance
Owner’s title insurance assures that both you and your lender are covered if unforeseen title issues come up. If you are contacted about paying for unpaid taxes or fees – or confronted with issues of inheritance or other property disputes – your insurer can negotiate and cover expenses on your behalf rather than leave you to deal with the problem yourself.
If you’re not sure if you have an owner’s title insurance policy in addition to the lender’s policy, inquire with the title insurance agency or company to assure you can add the coverage if that’s something you want. In many cases, owner’s title insurance is something your seller may pay for in addition to their share of closing costs.
Warranty Of Title
In some cases, particularly private or cash transactions, title insurance isn’t required.
In these situations, it’s important to consider warranty of title. Most real estate transactions have warranty of title built into them automatically. Warranty of title is a guarantee by the seller, included in the warranty deed, that the home buyer has full ownership of the property and there are no outstanding claims or liens on the house. If there actually are problems, the buyer can take legal recourse against the seller.
If you’re buying your home in a smaller, cash or other “unconventional” sale, check to see if the deed includes a warranty of title. If it doesn’t, you may want to consider purchasing owner’s title insurance for the additional protection.
How Much Is Title Insurance?
A title insurance premium is typically a one-time payment included in your closing costs and paid when you buy your house. The cost you’ll pay for title insurance varies based on the state you live in, the cost of your home and whether you’re buying your home or just refinancing. In general, expect it to cost $500 – $2,000.
Though it depends on the sale and what’s negotiated, in many cases, your seller will pay for your owner’s title insurance policy while you’ll pay for their lender’s policy.
Do I Need Title Insurance?
While you don’t necessarily need title insurance, forgoing it can prove risky. If you don’t have any title insurance coverage for yourself, you’re liable to pay for any outstanding title costs or issues.
For example, if you discovered there was a lien against your home because the former owners didn’t pay their property taxes, you might have to pay all the money that’s owed. This could be potentially thousands of dollars to settle the debt. Even if you avoid paying the debt, there would still be legal fees involved when attempting to fight the claim against your home.
The Bottom Line
While title issues aren’t something that will always pop up, if things do go wrong it can be costly and a huge risk to your investment in your home. Consider all the risks and benefits of title insurance before choosing a policy.
For more resources and information about titles, home buying, selling and more, visit the Learning Center.