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What Is Title Insurance and Do I Need It?

What Is Title Insurance and Do I Need It?
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Title insurance is a type of insurance that protects mortgage lenders and/or homeowners against claims questioning the legal ownership of a home or property (i.e., the title to the property). If disputes over title ownership arise after the purchase, the insurance policy pays for any legal fees to resolve them. 

Unlike other types of insurance that help cover future mishaps, title insurance is designed to protect the policyholder from any past title discrepancies from the seller or previous owner that might be uncovered during or after the purchasing process.

What does title insurance cover?

Title insurance covers any underlying issues with a home or property’s title that the title company may have missed during the home-buying process. In any real estate transaction, the title company runs a public records search to ensure that the home being purchased is free and clear of any liens or ownership disputes. This process confirms the seller’s legal right to sell the home. 

While this process usually goes smoothly, title insurance comes into play when disputes arise. Here are some of the more common title issues: 

  • Title forgeries
  • Back taxes
  • Filing errors
  • Unknown heirs to the estate who claim ownership
  • Inconsistent or conflicting wills
  • Liens, commonly from unpaid home equity lines of credit (HELOCs) or contractor bills
  • Undocumented easements

What are the types of title insurance?

There are two types of title insurance: lender’s title insurance and owner’s title insurance (also called buyer’s title insurance). They both provide the same kind of protection but cover different parties who have financial stakes in a property.

What is lender’s title insurance?

A lender’s title policy is designed to protect the financial institution providing your mortgage from title claims that would put their stake in your home at risk. Lenders almost always require borrowers to purchase title insurance on the lender’s behalf as part of the loan-approval process. It’s considered a closing cost.

What is owner’s title insurance?

The owner’s title policy is designed to protect the homeowner in case of any claims against their ownership of the home. In most cases, owner’s title insurance is not required in a home purchase, but it is recommended. It can be paid for by the seller at closing, so you may want to negotiate for it when you are purchasing a home.

What is a warranty of title?

If you are buying a home in cash or your lender doesn’t require title insurance, you can request that the seller provide a warranty of title, which states that they are the sole party with a right to sell the home.

How much does title insurance cost?

Title insurance policy costs often range between $500 and $3,500 for each policy, but varies by provider. The cost also generally varies based on property location, purchase price and the extent of the coverage. For example, you may opt to have a restriction endorsement to protect against any HOA or subdivision violations related to the home’s structure. 

Your title insurance premium is generally a one-time charge that’s paid at closing. In addition to the insurance itself, you may be responsible for other related fees, like wire transfer fees or courier charges. 

In many states, you can compare the prices of different title insurance companies. But in some states, including Texas and Florida, all title companies are required to provide the same level of coverage at the same price, so shopping around isn’t required.

Do I need title insurance?

It depends on the transaction. In most cases, buyers are not required to have their own policies. Still, if you want to protect yourself from potential legal costs in the future, you may choose to get a title insurance policy. 

Here’s an example: You purchase a home, and six months later you find out there was an old, unrecorded contractor’s lien against the property for $40,000. Since you are now the owner of the home, you might be responsible for paying off the lien to clear your title and/or paying legal fees to fight the claim.

How to choose a choose a title company

Pick a title company that comes highly recommended from friends, family, your lender or your agent. You might also check the years of experience, number of completed transactions and online reviews from former clients. You can find real estate title companies on Zillow’s professional directory.

Who pays for title insurance?

Typically, the buyer pays for their lender’s title insurance policy as a closing cost. Owner’s title insurance (which is not usually required) is often paid for by the seller as part of the offer negotiation.

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