Title Insurance: Why You Might Need It When Buying a Home
The process of buying a home is expensive.
Not only because of the down payment and the fact that you’re paying hundreds of thousands of dollars. But also because you’re responsible for closing costs.
These are lender and third-party fees.
They include the loan origination fee, attorney fees, appraisal fees, and also title insurance.
Title insurance is a typical home buying expense.
What exactly does it cover? And are you required to have a policy?
What Is Title Insurance?
Title insurance is unique from other insurance product in that it protects you and your lender against events that occurred in the past.
If you have auto insurance, home insurance, or health insurance, these policies don’t protect against past events.
They only protect against future events.
If you get into a car accident, your auto insurance policy can repair your car. And if you get sick, health insurance can reduce some of your out-of-pocket costs.
What Does Title Insurance Cover?
More specifically, title insurance protects against claims of defect.
This includes another person making a claim on your title after closing. It also protects against recording errors, fraud, forgery, past liens, and easements.
During the loan process, your lender will use a title company to conduct a title search.
This helps ensure that you’re buying a home that’s free of liens. A title search also verifies that the seller has the legal right to sell the home.
Title issues found in a search must be resolved before closing.
Only then will you sign the mortgage paperwork and transfer ownership of the property from the seller to you.
Your name goes on the title. This is your proof of ownership.
Issues that may arise
But even after a title search, a property lien can show up after closing.
A previous owner might have failed to pay a tax debt or a construction bill, resulting in a lien on the property.
Or, a previous owner’s heir (not necessarily the current seller) might claim that they have a legal right to the property.
The truth is:
There’s always a risk of someone challenging a title after closing. Disputes over title ownership can even happen years after closing on a property.
Title insurance protects policyholders in this situation.
Do I Need Title Insurance?
There are two types of title insurance.
One policy protects the mortgage lender. It is required when financing a home.
There’s also an owner’s title insurance policy. This policy isn’t required but highly recommend.
A lender’s policy only protects the lender from financial loss. It pays their legal fees if someone challenges the title in the future.
An owner’s title insurance policy, on the other hand, protects you from financial loss if someone sues and claims ownership of the property.
Getting an owner‘s policy is assurance that your title insurance company will cover legal fees incurred defending your title.
Some homebuyers feel that title insurance is unnecessary.
Yet, your home is one of your biggest investments. It only makes sense to protect it from title issues — just in case.
As an owner, keep in mind that title insurance is also important for a new construction property.
Although unlikely, your builder might fail to pay a subcontractor.
And as a result, this contractor could attempt to put a lien on your property. An owner’s policy protects you from incidents like this.
An owner’s policy is also useful when paying cash for a property. Even though you didn’t involve a mortgage lender, someone might still challenge your title down the road.
To be clear:
A title insurance policy doesn’t guarantee that you won’t lose the property.
This is always a possibility if someone truly has legal claim to the home.
However, title insurance provides peace of mind and that you won’t lose what you’ve invested in the property.
How Much Does Title Insurance Cost?
The cost of title insurance varies, but you can expect to pay between $1,000 and $3,000 for a policy.
Unlike other insurance premiums — which are paid monthly — title insurance is a one-time upfront premium.
You’ll pay this premium at closing, as your lender will include it with your closing costs.
As far as the lender’s policy, buyers are typically responsible for the premium.
If you choose to get an owner’s policy, you’re responsible for this cost.
But some buyers ask the seller to cover the cost of their premium. If so, you’ll need to include this request with your purchase offer.
The one-time premium for title insurance protects you or your lender for the life of the loan.
The policy ends when you pay off the loan in full, refinance the loan, or sell the property.
When Do You Purchase Title Insurance?
Once the seller accepts your purchase offer and you decide to proceed with a home loan, your mortgage lender starts preparing your loan file for closing.
The title company conducts the title search during this process. Your mortgage lender will select their own title company.
If you’re purchasing an owner‘s policy, notify your lender as soon as possible. You can get an owner’s policy from the same title company the lender uses. But feel free to shop around and buy an owner’s policy from a separate company. You might find a cheaper rate elsewhere.
Don’t procrastinate when it comes to getting your own policy.
Ideally, you should purchase title insurance before closing. This isn’t required, though.
It is possible to buy title insurance after closing on a home. However, this approach isn’t recommended because it can cause a gap in coverage. When you buy title insurance before closing, you’re protected against events that take place before and after closing.
If you buy a policy after closing, the policy may or may not cover an event, depending on when it occurred.
Let’s say you close on a mortgage on July 1. You didn’t have title insurance at closing, but you purchased a policy five months later on December 1. If a previous owner’s contractor puts a lien on the property after July 1 and before December 1, the title insurance policy will not protect you.
Your home is an important asset, so getting title insurance is one of the best ways to protect your investment.
Even though title issues are unlikely, they can happen — even years after closing.
Title insurance provides peace of mind and assurance that you’re protected from financial loss.