Imagine going through the long process of buying your dream home — house hunting, making an offer, applying for a mortgage, closing on the home, and moving in — only to one day receive a letter from someone who’s legally challenging your ownership of the property.
Luckily, there’s a type of insurance that covers you and your home against claims from the past: title insurance. It offers protection against financial loss if someone sues you over claims like back taxes and unpaid contractor work from before the property became yours. While owner’s title insurance is optional, it’s a good idea to weigh the potential risks of your specific situation.
Here’s what you should know to make an informed decision about getting title insurance:
- What Is Title Insurance?
- What Does Title Insurance Cover?
- Do I Need Title Insurance?
- How Much Does Title Insurance Cost?
- The Bottom Line
What Is Title Insurance?
A “title” is the legal ownership of a home that’s documented on the property deed. When you buy a home, the seller transfers the title into your name. However, it’s possible that someone else will claim they possess the rights to the home — and that’s where title insurance comes in.
Title insurance is available to protect both homeowners and lenders from any such dispute. The title company you choose will examine property records to search for potential issues with the title, and it may order a property survey, which will verify that the home sits within its legal boundaries. Once the company has confirmed that the title is valid, you’ll be issued a title insurance policy.
What Does Title Insurance Cover?
Title insurance covers any claims disputing the legal ownership of your new home, as well as unknown property liens (aka debt notices from creditors), back taxes, and the legal fees you’d incur if another party tries to claim ownership.
Unlike homeowners insurance and other types of insurance that protect you against potential events in the future, title insurance only covers situations that occurred before the policy was issued — like unpaid property taxes from a previous owner 30 years ago. It won’t take care of any new issues that affect the title after you become the homeowner.
The function of title insurance varies depending on who the policy is intended for. There are two different types of title insurance: owner’s title insurance and lender’s title insurance.
Owner’s title insurance
An owner’s title insurance policy covers you, the homeowner. It protects your investment in the home by compensating you for any financial loss due to a title issue. If someone sues you, the title insurance underwriter would be required to defend your right to the property.
As you continue making mortgage payments, your exposure will increase as your equity in the property grows. If there’s a title dispute early on, most of the ensuing financial fallout is on the lender, but more and more of your money is on the line over time.
In the event that someone else possesses a legitimate claim to the title, you may have to move out of the home. However, your owner’s title insurance would supply the funds for you to purchase another home of equal value. Although it’s optional, owner’s title insurance could end up saving you a lot of money down the line.
Lender’s title insurance
Mortgage lenders will often require you to buy lender’s title insurance, which protects the amount that they’ve loaned to you against any issues with the property’s title. Such policies only cover the amount in which your lender has a stake. That means the value of lender’s title insurance decreases over time as you pay off your mortgage.
Keep in mind that lender’s title insurance doesn’t protect your equity as the homeowner. So, if someone else has a valid claim to the property, the lender will get its money back — but you won’t be covered.
Do I Need Title Insurance?
If your home is brand-new or was built in the past few years, you might dismiss the possibility of a title dispute because it’s likely there haven’t been many previous owners. While it’s true that older homes can have a murkier history, a newer home may still be vulnerable to other types of claims.
For example, other parties might have been granted the right to use the lot that your home was built on — that’s called a property easement. There are cases where utility companies have the right to maintain an electrical pole or build underground lines on an owner’s land. You may hold the title, but someone else can legally use your lot — and sue you for denying access. Running a title search helps you uncover recorded easements before you close on the home. Prescriptive easements, on the other hand, are not covered by title insurance. This type of easement is not recorded and arises when part of your property is used over time unnoticed or without your permission. For example, a neighbor’s fence on your side of the property line.
Ultimately, your decision to buy or forgo title insurance will depend on your personal situation and how much financial risk you’re willing to take on.
How Much Does Title Insurance Cost?
The average cost of title insurance ranges from $500 to $3,500 for each policy, according to Zillow. The cost can vary depending on the home’s location, the purchase price or loan amount, your credit score, and other factors. However, there are exceptions. Some states like Texas require title insurance companies to offer the same services and premium rate, based on the property’s sale value.
Unlike other forms of insurance, you only pay once for title insurance, usually as part of your closing costs. If you’re wondering who pays for title insurance, the typical answer is the homebuyer — regardless of whether you’re purchasing lender’s title insurance or owner’s title insurance. However, you may be able to negotiate with the seller about including owner’s title insurance in the purchase agreement.
You can compare title insurance quotes and shop around for the best deal to lower your costs, but it’s usually cheaper to bundle lenders and owner’s title insurance policies compared to purchasing them separately.
The Bottom Line
Despite your best efforts to learn about the history of your new home, you may not be informed of every detail, which can lead to unpleasant surprises down the line. Title insurance helps protect you financially from claims on the home outside of your control. While lender’s title insurance will likely be required if you have a mortgage, buying owner’s title insurance is up to you — but it might be a good idea if you want peace of mind.
