Title insurance: What you need to know

Key takeaways:

• Title insurance protects homeowners and lenders if someone challenges their interest in a property.
• Lenders’ title insurance is required, but owners’ title insurance is optional.
• While title insurance cost varies, the premium is most influenced by loan amount or purchase price.

You’re not required by law to purchase title insurance, but it’s essential to protect your property interest in the event of future claims against your ownership stemming from disputes over the seller’s right to dispose of the property in the first place or undiscovered outstanding liens. Lenders require it to protect their investment.

Home title insurance can have a couple of different beneficiaries. We'll go over the ins and outs of policies and the benefits involved.

What is title insurance?

Home title insurance offers protection if a person or entity comes forward with a claim to ownership of your home. House title itself refers to the ownership rights you have in your home. While physical documents like the deed and abstract of title are part of the ownership transfer process, title doesn’t have a physical document.

Title may not be a physical object, but how many abstract ideas have you heard referred to as “clean” or “dirty”? A clean or good title is one where there’s a clear ownership right easily established. A dirty or bad title is one where things in the history of the property make the chain of title or ownership rights murky.

It may be easy to confuse title insurance and homeowners insurance, but they cover different things. Title insurance is purchased to protect ownership or a lender investment. Homeowners insurance covers damage to the home and may cover personal property and liability if someone is injured at your home.

Title insurance doesn’t get used very often because the purpose of a title search is to discover outstanding issues before they become problems. But things do occasionally get missed. When that happens, title insurance protects you against the following general claims:

• Outstanding liens for back taxes or unpaid contract work (mechanic’s lien)
• Ownership claims due to conflicting wills and disputed inheritance

What does title insurance cover?

Every title insurance policy will have different terms and exclusions around what’s covered. You’ll need to read the policy and the endorsements associated to be sure what applies. The types of coverage you need will likely be determined by what comes up in the title search. However, policies fall into a couple of categories.

Lender’s title insurance policy

Lender’s title policies have the following characteristics:

• Required by most lenders for the life of the loan
• Only protects the lender in the event of a bad title event
• Expires when the loan is paid off
• Cost is based on loan amount

Lender’s title insurance is typically required for the life of the loan if you’re getting a mortgage. The lender can get the loan amount back if there’s a claim to ownership that affects their investment in the property. It’s issued once the title search is complete.

Owner’s title insurance policy

An owner’s title policy has the following characteristics:

• Not required
• Protects the property owner’s liability in the event of a bad title event
• Valid for as long as you own the property
• Cost varies based on the price of your home

An owner’s title policy protects the owner against any encumbrance that limits their property rights as well as paperwork mistakes and even outright fraud by the original seller. For example, an owner’s policy will cover newly discovered property tax and mechanic’s liens from prior to the sale.

It can also indemnify you against issues stemming from incorrect public records, defend you in cases of fraud or forgery by the seller or compensate you if an undisclosed easement or similar agreement limits your usage or reduces the value of your property.

Alternative to a title policy: Warranty of title

A warranty of title is a document signed by the seller stating that the title is clean and that there is no other security interest or encumbrance on the property that would infringe on the current or future ownership rights of the buyer. If someone came forward with a claim, the buyer could take legal action against the seller.

While this may be an option in lieu of an owner’s policy, a lender is likely to require title insurance.

FAQ

Let’s run through some common questions.

Is title insurance a good idea?

If you have a mortgage, the lender is likely going to require title insurance. Even if you don’t, an owner’s title policy is a good idea because your property interest will be protected if ownership claims come up in the future.

What is the disadvantage to title insurance?

The only disadvantage is having to pay for it. But the benefit of peace of mind over potential future ownership challenges outweighs the cost for many.

What is the title settlement fee?

A title settlement fee is charged by the title company to facilitate the closing.

What is an alternative to title insurance?

An alternative to title insurance is securing a warranty of title. This involves the seller signing a personal guarantee that the title is clean. Your recourse in the future would be to take the seller to court if there were issues with the title. The lender will likely still require you to purchase a title insurance policy.