For most people, their home is their single most valuable asset. Therefore, protecting that investment is essential to a homeowner’s financial security. A home’s title proves who owns a property and contains other specifics about a property. Title insurance protects homeowners from the risk of claims against the title on a home, which can be financially debilitating to new homeowners.
What Is Title Insurance?
Title insurance is insurance on the title of a home or other piece of property. When closing on a home, there is typically a mandatory title search that proves a home’s title is free of discrepancies or liens. However, mistakes are sometimes made, transfers are improperly recorded, frauds can occur, or unknown heirs may suddenly appear with a previously undiscoverable claim. With title insurance, homeowners are protected against any costs that arise with the title after closing on a home, including legal expenses.
How Does Title Insurance Work?
When a home is sold, the title must be clean. A clean title verifies that the seller owns the property and can sell it. However, sometimes some issues arise after a home is sold that contests the seller’s ability to sell it.
A common issue is an encroachment. Encroachment occurs when someone builds something that is wholly or partially on another’s property. An example would be one neighbor building a shed that crosses the property lines. If neither neighbor had challenged the land boundary previously, it might not be known that there is an issue with the property lines until after the property sells.
Another example is an easement. An easement also includes a person building a structure on another’s property, but that person has gained an agreement to access that portion of the property.
The difference between encroachment and an easement is that encroachment is never formally recognized or recorded. If one of the properties sells and encroachment is found later, title insurance will pay for any legal costs and out-of-pocket losses and expenses.
What Does Title Insurance Cover?
If there is a claim against a title, the costs to solve the claim can be expensive. Homeowners with title insurance can use their policy to pay for legal counsel, which alone can cost thousands of dollars should litigation arise. Title insurance will also pay any expenses that arise from fixing a property condition that interferes with a non-owner's easement rights.
In addition to being expensive, some claims against a title, or title defects, can result in the home's loss. Title insurance protects homeowners against these losses up to the face value of the policy.
Are There Different Types Of Title Insurance?
Two forms of title insurance exist to protect the interests of both lenders and homeowners. Both have unique qualities, and some borrowers will purchase both types of title insurance.
Lender’s Title Insurance
When a borrower purchases a home, most lenders require a title insurance policy. Lender’s title insurance protects both the lender and the borrower because if a title defect or a prior title claim is successful, the homeowner could lose their home. If a homeowner loses their home, the lender’s title insurance prevents the lenders from losing the mortgage.
Home buyers should know that a lender’s title insurance policy will not benefit the borrower directly. It only protects the lender against loss. However, it also prevents the lender from pursuing legal action against the borrower if there were to be a title claim made. An issued policy shows that there has been a completed title search and provides some assurance to the buyer that they will not have any issues with the title.
Owner’s Title Insurance
The only thing that will protect a homeowner’s down payment, equity, and other investments in the home is the owner’s title insurance. The owner’s title insurance will cover a homeowner up to the face value of the policy.
How Much Does Title Insurance Cost?
Whereas other insurance policies require multiple payments, title insurance is a one-time charge. In a buyer’s market, many buyers have successfully passed these insurance costs on to the seller. Regardless of who pays for title insurance, many title insurance companies charge far less for the owner’s title insurance policy if they purchase the lender’s policy from the same company.
It’s vital to shop around to get the best prices on title insurance policies. Title insurance policy prices vary between insurance providers, the home's location, and the price of your home. However, the average cost of title insurance is about $1,000, and all homebuyers are encouraged to shop around for a good deal
Do I Need Title Insurance?
There are many things a home buyer should consider when asking if they need title insurance. For example, title insurance has a low payout rate of about 4 – 5%. This low payout rate means that there are not many title insurance claims made. Although the risk of having issues with your house or property’s title is small, the loss of a home or the investment that a person puts into their home could be financially catastrophic.
If there is a claim on a property and is ultimately denied, litigation costs could overwhelm many homeowners without title insurance, covering all legal expenses. Therefore, the benefit might outweigh the price, especially if your home has any risk of not having a clear title.
Summary: Peace Of Mind, At A Price
Title insurance protects homeowners and lenders against any title issues after a house or property sells. With title insurance, if there are any claims against a title, the lender’s title insurance will prevent the lender from losing the property. In the same situation, the owner’s title insurance will protect the investment that the owner has put into the property, including their down payment.
Title insurance typically costs about $1,000, but home buyers are encouraged to shop around to get the best price and coverage for their needs. Many insurers will offer a better price when a home buyer purchases both lender’s and owner’s title insurance.
If you are in the market for a new home, you can find more information about titles, lending and home buying in the Learning Center.