Buying a home often entails also buying various types of insurance to protect your property, and one type you might need to get is called title insurance.
So what is title insurance? When you buy a home, you “take title” to it and establish legal ownership. A title insurance policy protects you against the possibility that someone else might have a claim on your home.
If you need a mortgage to buy real estate, your lender will likely require you to buy a title policy from a title insurance company. Although it's a cost home buyers incur, getting a title policy from a title insurance company is critical to establishing peace of mind.
Here's more about how a title company works, why a title search is required for a mortgage, and more that home buyers should know.
Why a title search is required with a mortgage
When getting a mortgage to buy real estate, you'll find that most lenders will typically require that you get a title search before you close the deal with your escrow company. Basically this would mean you'll have to hire a title company to search local records on your property. Some of the issues they’re looking for include the following:
- Disputes between prior owners over wills: If your property was inherited and then sold by the heirs, there could be other heirs contesting the will and claiming ownership of your property.
- Liens for unpaid property taxes.
- Liens for contractors who worked on the home but were never paid.
- Clerical problems in courthouse documents: Believe it or not, a simple typo can lead to title claim problems.
- Fraudulent claims against the property or forged signatures: For example, if a group of heirs can't get a holdout to agree to sell the home, it’s possible that someone will forge a signature on a quit claim deed.
While most homeowners will never need to use their title insurance, its existence offers protection against a potentially aggravating—and very expensive—financial loss.
Lender’s title insurance vs owner's title insurance: What's the difference
When getting a mortgage, the home buyer pays their lender’s title insurance premium. But keep in mind that this policy will only insure the lender in the case of a claim against the title. The lender's title insurance policy pays for the expense of the insurer researching a claim and any court costs incurred due to the dispute.
In addition to offering a policy to the mortgage lender, a title company will offer the home buyer their own insurance, called owner's title insurance. In many states, owner's insurance is optional. In most areas, it's common for buyers to purchase owner's title insurance, but in some areas it’s more common for the seller to buy the policy.
Owner’s title insurance is recommended, because lender’s insurance won’t protect you personally if the insurance company loses a battle over legal title. You'd be required to pay for the continued fight over the title and could lose your investment in the property.
You can purchase basic or enhanced owner's title insurance, with the enhanced insurance policy offering more coverage for things like mechanic’s liens or boundary disputes.
While your title insurance covers you for things such as mistakes in the legal description of your property or human error, be aware that it will have some exclusions—particularly in cases where violations of building codes occur after you bought your home.
How much does title insurance cost?
The average cost of title insurance is about $1,000 per policy. However, that amount varies widely based on the price of your home, where you live, and any potential issues that crop up during your title search (here's more on how much title insurance costs).
Unlike other types of insurance, a title insurance policy is paid with a single premium during escrow while closing for your mortgage. If you’re buying a real estate resale or refinancing, you may be eligible for a "reissue" rate, which could offer a substantial discount off the regular premium—because the title policy is already in effect, and the title research has already been completed.
In some states, title insurance premiums are the same no matter who you work with, but in the majority of states, you can save money by shopping around.
Get recommendations on title companies from real estate agents, lenders and friends, and be sure to check out the license and reputation of different title companies online. Always compare the features of each policy and get adequately covered for the real estate you're purchasing.