Title insurance is an insurance policy that you purchase when buying a house — it protects you against any errors in record for who is listed as a registered owner of your home.
What is title insurance?
Let’s start from the beginning: ‘title’ is a legal way of saying you’re the registered owner of something, so in real estate that means your property.
But you’ve just bought your home, so don’t you already own it? Great question. In real estate terms, there’s a difference between ownership and title, and to properly own something in full you need to have both. When you purchase a new property, the title is passed down from the previous ownership to you. However, that doesn’t mean that someone else might come along and decide they have rights to the title.
Title insurance protects you in case someone tries to take that right away from you. It also protects you from a whole host of tricky circumstances including any outstanding court cases or debts against the property.
What does title insurance cover?
Title insurance is split into two types of policies:
- Owner’s title insurance (aka homeowner’s title insurance), which covers the home buyer
- Lender’s title insurance (covers the mortgage lender)
In both cases, the coverage is the same. And whether or not you’re responsible for paying both policies depends on the rules of your mortgage.
A typical title insurance policy covers for the following hazards:
- Fraudulent claims on the property
- Incorrect signatures on documents
- Mistakes in record-keeping
- Outstanding court cases or tax debts against the property
Do you need title insurance?
Yes! You need to purchase title insurance as part of your mortgage process. However, owner’s title insurance might be optional, but lender’s title insurance will always be mandatory. Most real estate experts advise buying both.
Why? Well, there have been incidences where an older document proves someone else has the rights to your property. This is usually the result of past fraud or forgery, or inaccurate record keeping. In fact, the American Land Title Association reported that one in three properties have a title or public record defect.
So let’s say you’ve found your dream home, and out-of-nowhere you’re asked to pay a truck full of taxes that were not paid when due by a previous owner. In this case, your title insurance policy would cover the cost of the taxes, and protect you from any other financial loss due to mistakes in the property title.
When do I need to buy title insurance?
You’ll be asked to purchase title insurance during the mortgage process, and it’s usually a ‘must-have’ because lenders want to protect the house they’re using as collateral for a loan. If there are any disagreements around who owns the right to your property, your title insurance policy will kick in and pay the legal fees to place that title back in your name, or cover you in case you lose the house.
So let’s say you’ve just bought your dream home – (cue the fireworks) but along comes an individual with a document saying he owns the title to your home.
Could this really happen?
Technically yes, if a fraudster steals your personal information and transfers the title of your home to his name without your knowledge. Having title insurance pays for any sort of legal process you have to go through to fight the fraudster’s claim.
Who pays for title insurance?
Depending on your state’s regulations, the home buyer might be required to buy both the owner’s insurance and lender’s insurance. Alternatively, the home seller might need to buy either one or both policies.
How much does title insurance cost?
The cost of your title insurance depends on your state, how much you’re borrowing, and the specific location of your home. Typically, title insurance costs anywhere between $500 and $1,500 which you’ll have to pay just one time. According to Value Penguin the average cost of title insurance in 2019 is $544 for the lender’s policy and $830 for the homeowner’s policy, in total $1,374.
Why does it vary by state? Some states demand more thorough research from the title insurance company, which makes the policy more expensive.
FYI: The owner’s title insurance is typically a little more expensive than lender’s title insurance.