What is Title Insurance?

A title insurance company is like a private investigator with a ‘money-back guarantee’…

A title insurance company performs an investigation for you, much as a private investigator might. But, if they make a mistake, they’re on the hook for the financial losses an incomplete investigation might incur.

The purpose of title insurance is to help protect a home buyer and a mortgage lender from losses as a result of problems with the title of a home — The owner policy protects the buyer, while the lender policy protects the lender. Lenders will usually require that buyers pay for title insurance to protect the mortgage provider, but title insurance to protect the buyer is typically optional.

You might be wondering — If title insurance is optional, do I really need it?

Many possible situations could arise that would result in you losing money on your home purchase. And while most title insurance policies never result in a claim, it could save you a substantial amount of money if anything goes wrong.

Not only are you at risk of paying unnecessary legal fees, but you could also face the potential of losing your home and all the money you’ve put into it.

When you purchase either lender or owner title insurance, the title company will first do a search of the home’s entire history. It will look into previous owners, previous liens and levies, the property tax history, and more to ensure the title is clean (meaning there are no defects on it).

The title company might not find anything, but that doesn’t mean the insurance was a waste. The benefit of title insurance is that not only does the company run a thorough search when you first buy your policy, but the company will be there to protect you as long as you own the home. And the lender policy will continue to protect the lender for as long as there is still a mortgage out on the home.

Let’s say that the title company didn’t find anything in their search, but an issue arose years down the road. Because you purchased owner title insurance, your insurance company should reimburse you for your losses or defend you in potential litigation.

There are two different types of title insurance, depending on who the insurance is protecting — There is title insurance to protect the lender and title insurance to protect the homeowner. Title insurance for the owner protects the homeowner’s financial investment, while coverage for the lender protects the mortgage provider from losing their investment.

Often, the lender will require that the new homeowner buy title insurance to protect them. Homeowners purchasing a title insurance policy for their lender might be able to get a discount if they also purchase owner’s title insurance through the same insurance company.

In addition to lender’s and owner’s title insurance, there is also a type of protection called a warranty of title. Through this warranty, the seller of the home promises that they are the sole owner of the house and have the right to sell it.

Title insurance covers any defects or problems that might arise with the title of your home. Though the title company will do its due diligence to dig up any potential issues, it’s possible that they could miss something. If that happens, the insurance policy is still there to protect you if you need to file a claim.

Let’s talk about some of the more common title insurance claims.

One example of a problem that might occur is finding out that the previous owner had not paid their property taxes. Unfortunately, this is a liability that falls on the owner of the home. If you’ve purchased the house and don’t have title insurance, it will be your responsibility to pay those back taxes. But if you have purchased a homeowner title insurance policy, your insurance company should be there to protect you.

Another example of a title defect could be a lien that the previous owner failed to disclose. This lien could be the result of a home equity line of credit or other debt that the previous owner owed to a bank or financial institution. Unfortunately, a lien could mean that a lender has a claim to your home.

You could also run into situations where the property should have gone to someone else but it fell through the cracks. For example, suppose that a homeowner dies without an obvious heir. In this case, the house might have gone to the state or a lending institution that had a lien on the home. The state or bank might have then gone on to sell the house. Well, things could go awry if later down the road, a missing heir comes to claim his or her right to the house after you have already purchased it.

Similarly, suppose that the individual with no obvious heirs had a will that didn’t appear until months or years after the state or bank sold the house. If it turns out that the will included instructions for who should get the house, that situation could also put your ownership of the house in jeopardy.

Even something as simple as a clerical error at the local government level could cause a problem with your rights to your home. Your local government is just as likely to make administrative errors as anyone else. Even in the case of a clerical error that isn’t your fault, you might end up paying a large chunk of money to defend your rights in court.

Though they’re unlikely, any of these circumstances could arise and cause you to face significant financial losses. These are precisely the situations for which title insurance is there to protect you. If one of these situations comes up and the title company didn’t catch it ahead of time, they’ll be there to help and protect you from losing your money or your house.

The amount of time that title insurance applies depends on which type of title insurance it is. It can be a little confusing since, unlike other types of insurance, you don’t pay continued premiums for the entire length of the policy.

For the lender’s title insurance, the policy usually protects the lender until the homeowner has finished paying off their mortgage. At that point, the lender is no longer at risk of financial losses, and so they no longer need protection.

For the owner’s title insurance, the policy usually applies in perpetuity as long as the homeowner or their heirs own the property. If you buy title insurance for your house and own the home for 50 years, the title insurance should protect you for as many years.

Shopping for title insurance will be just one of the possible steps you take as you prepare to close on your house. Even though the lender might require that you purchase title insurance, they don’t necessarily choose the insurance provider.

Your real estate agent can typically help you to find a title insurance company. You can also talk to friends and family for recommendations on a company. Finally, several online resources like Zillow and the American Land Title Association have databases of companies that provide title insurance.

The amount that you’ll pay for title insurance will vary depending on where you live. In some states, you won’t have to worry about shopping around. States like Texas and Florida require that all title insurance companies provide the same level of coverage at the same price.

If you’re like most people and don’t reside in one of the states that require this pricing structure, there are likely going to be more variables. Title insurance costs for an owner’s and lender’s policy together usually amount to between 0.5% and 1% of the purchase price of the home. So if you’re buying a house for $200,000, you’re probably going to pay between $1,000 and $2,000 for coverage.

One characteristic that makes title insurance unique is that you pay for your policy in a single lump-sum payment. There are no monthly or annual premiums to keep your coverage. And once you pay your premium at the very beginning, your title insurance is there to protect you.