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Title insurance is a fee you’ll see on your closing documents that may make you wonder, what is it, and why am I paying for it?
While it sounds like another unnecessary insurance policy, title insurance is very valuable when it’s needed.
You can consider yourself lucky if you don’t need it, but if you do, you’ll be glad you have it.
What is Title Insurance?
Title insurance is one of those necessary things you need when you buy a house, but it’s one expense most people don’t understand.
There are two types of title insurance – owners and lender’s title insurance. Only lender’s title insurance is required when you take out a mortgage, but most buyers buy an owner’s policy too. Title insurance protects either you or the lender from title defects.
Title defects are issues either the title searcher missed or wasn’t apparent when they examined the title. Common defects include liens, back taxes, or ownership contention due to past ownership or inheritance.
If you don’t have title insurance, you would be on the hook for the thousands of dollars in legal fees or expenses that come about because of the defects.
How Title Insurance Works
Title insurance protects you or the lender (both if you have both policies) from the financial cost incurred from any defect in the title.
For example, if an unpaid lien from years ago pops up when you own the property, your title insurance would cover the cost rather than you paying it out of pocket even though it had nothing to do with you.
Title insurance works differently than any other type of insurance. For example, car insurance protects you from future accidents or incidents, but title insurance protects you from past incidents.
Since liens, encumbrances, and ownership claims attach to the property, not the owner, you would be liable for things you had nothing to do with but are now your problem because you own the property.
Title insurance covers the costs to settle the issue and any legal battles that occur because of it.
>> More: What Is a Clear Title?
Types of Title Insurance
Owners Title Insurance
Owner’s title insurance is optional, although most owners buy it. You can even negotiate the cost with your seller, asking them to cover it for you.
Owner’s title insurance has a one-time cost. Once you buy it, you are covered for the time you own the home.
An owner’s policy protects you from some of the following risks:
- Issues with ownership due to a conflicting will, incorrect transfer of title, or other ownership issues
- Inaccurate or fraudulent records
- Lawsuits
- Easements that weren’t discovered during the title search
Lenders Title Insurance
Lender’s title insurance only protects the lender. It protects the mortgage lender from financial loss occurring from any of the situations described above for owners. But lender’s insurance is only for the amount up to the mortgage.
For example, the lender’s policy would cover the lender if someone tried to stake a claim to the house after you closed on it.
But it would not cover you should back taxes resurface after the title search. You would be on the hook for the back taxes unless you had an owner’s policy that would protect your financial interests in the property.
How Much Does Title Insurance Cost?
The good news is you only pay for title insurance on time – when you close on the loan. Your owner’s policy covers you for the time you own the home. The lender’s policy is for each lender, so you must pay for another lender’s policy if you refinance your mortgage.
On average, title insurance for both a lender’s and owner’s policy costs between 0.5% and 1% of the sale price or $500 – $1,000 for every $100,000.
You can choose your title company – you aren’t obligated to use the title company the lender uses. If you want to shop around to get the best rates, you can, but you may not save as much as you think.
What Does Title Insurance Protect Against?
Title insurance protects the owner or lender from any defects in the title. Sometimes things slip under the radar and aren’t caught during the title examination that may affect your ownership. Title insurance covers the cost of such events, including any legal fees you may incur.
Some common occurrences include:
- Unpaid mechanic’s liens
- Unpaid tax liens
- Unpaid debts, including unpaid homeowner association dues
- Fraudulent documents
- Encroachments
- Inheritance issues
>> More: What Is a Title Contingency?
Is Title Insurance Required?
If you’re borrowing money to buy a home, the lender will most likely require title insurance. This is how they protect their interest in the property. The premiums, which are a one-time fee, are your responsibility, though.
Owner’s title insurance isn’t required but is highly recommended. Many sellers pay the premium for the buyer to help with the cost and to show good faith that they don’t believe there are any title issues with the home.
>> More: Largest Title Insurance Companies
What Are the Risks of Not Having Title Insurance?
Even though it’s another expense, the risks of not having title insurance are even greater. If you find out the home has unpaid taxes to the tune of thousands of dollars, you’re on the hook for it if you don’t have title insurance.
What if someone took you to court to claim ownership of the property because of a complicated will that didn’t get executed properly? Without title insurance, you’d be on the hook for the legal fees and any other financial liabilities that occur.
Lenders would also be at risk without title insurance. If there’s an ownership issue and the owner defaults on the mortgage because of the complications, the lender would be without the money owed if there wasn’t title insurance.
Bottom Line: What is Title Insurance?
Title insurance is a necessary evil. Lenders require it, and owners should always have it to protect themselves against any claims on the property. Even the best title examiner can miss an issue, or it can come up after you buy the property.
Title insurance protects you financially so you can afford to stay in the home and fight the battle and/or satisfy any liens that come up later.
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