For most aspects of our lives, there are corresponding insurance policies: Health insurance, car insurance, life insurance, long-term care insurance. Insurance is designed to safeguard yourself, your family and your property from harm and make sure services will be available when needed.
Title insurance is on that list, but many people don’t even know they have it. It’s part of a list of fees in the mountain of paperwork that’s required to buy or sell a house.
When you buy or sell a house, the piece of paper that officially transfers the property to or from you is called a title. Title insurance is unlike many other types of insurance in that it is backward looking. Instead of protecting you from situations in the future, it covers events relating to the property before you owned it. It is a big industry, valued at $15 billion. And it’s growing.
What is Title Insurance?
Before a lender will loan you money to buy a house or condo, they require that a qualified third-party do a title search to make sure the title is clean and no one has claims against the property. Title insurance protects the lender in the amount they lend to purchase the property. This is especially true during the early years, when most of the mortgage is still outstanding and payments are mostly toward interest.
There are two kinds of title insurance. Lender’s title insurance, as described above, protects the lender and is part of the homebuying process. Owner’s title insurance protects the homeowner. The owner’s policy covers the total value of the property at the time of purchase.
What Does Title Insurance Protect?
Depending on the policy, title insurance protects either lenders or owners against undisclosed and undiscovered claims of ownership against the property. Potential problems include deeds, wills, and/or trusts that contain incorrect names; outstanding mortgages; tax liens and easements on the land.
Most of these issues will be found and cleared up in a title search. Title searches are thorough, but not perfect. An undiscovered issue could cloud the ownership of the property years after the purchase. That could be a mistake in the ownership history, an oversight committed by the title researcher, even a previously unknown heir. Maybe there’s a pending lawsuit or legal judgment. A title issue could also arise related to fraud.
Owner’s title insurance, like lender’s title insurance, protects against all these things. Some owners policies also offer extended coverage. These policies protect against issues including building permit violations, zoning law violations, certain types of structural damage and inaccurate surveying.
For a more detailed look at what title insurance will and will not do, read this report by the American Bar Association
Do You Need to Get Title Insurance?
Buyers do not have a choice about lenders title insurance. Most all lenders require it. Owner’s title insurance is not always required. It protects the buyer's equity in the property, and is sometimes purchased separate from a lender’s policy. In some states, it is purchased by the buyer, and in other states, the seller. However, a lenders and owners policy are often required together and purchased for a one-time fee.
There are some good reasons why it is required. If anything is missed during the title search, or there are lawsuits questioning your ownership of the property after closing, your title insurance owner’s policy will cover the costs of resolving those problems. According to the American Land Title Association and a U.S. News and World Report one in three properties has some complication or defect with its title that needs to be fixed before the final sale. And an estimated 4% to 5% of title premiums collected are paid out in claims. That is a similar usage rate as homeowners policies, and these, like lenders title insurance, are required.
What Does Title Insurance Cost?
Title insurance rates vary by state and company. Title insurance is one-time fee. The American Land Title Association provides an online searchable list of title insurance companies by state, county and city.
Rates for lenders insurance are about $2.50 per $1,000 of coverage, or $750 for a $300,000 home. Owner’s title insurance costs around $1,000 depending on the size of your home and its location. A study of three insurers by Value Penguin found that owner’s title insurance for a $400,000 home ranged from $846 to $1,764.