What is Title Insurance and Why Do You Need it?

Title insurance is a type of insurance that covers potential damages from errors in the ownership records of your home or property. In most cases, you purchase title insurance when you get a mortgage. Title insurance policy covers either a homeowner or a mortgage lender, but you'll usually need to pay for both types as part of your closing costs.

What is Title Insurance?

A title insurance policy pays the policyholder if there's anything wrong with the title for a property. In US states, the recorder of deeds doesn't guarantee perfect accuracy in its record-keeping. This means that it's possible for someone with an older document to press a claim on your newly purchased home, if there is evidence of past fraud or forgery. Title insurance pays for the cost of "perfecting" your title rights or provides compensation if you lose the property altogether.

Every title insurance policy covers either a homeowner or the lender that financed the mortgage for the property. Lenders require you to pay for lender's title insurance as part of your mortgage closing costs. Homeowner's title insurance is mostly optional, and is paid for by the seller or the buyer of the property. Title insurance coverage begins when you buy the policy and extends indefinitely into the past, covering both known and unknown inconsistencies in the documented history of ownership.

Why Do You Need Title Insurance?

Purchasing lender's title insurance is a mandatory part of the mortgage process. However, it's often a good idea to buy title coverage for yourself as the homeowner. Title insurance can compensate you for damages or legal costs in a variety of situations.

Title Insurance Protects You From…

  • Previously unreported liens and easements on the property
  • Forged transfers of ownership rights in the property
  • Unintentional errors in recording or filing of documents
  • Any other title defects that existed prior to the start of your policy

While the actual number of claims paid out to title insurance purchasers is relatively small, the open-ended nature of land recording in the US means that there are several scenarios—however unlikely—where title insurance can save you thousands of dollars in legal fees. The possibility of defective title goes up if you're purchasing a foreclosed or otherwise troubled property. In the most extreme situation, title insurance could end up compensating you for the forfeiture of the whole property.

How Much Does Title Insurance Cost?

In most situations, mandatory lender's title insurance costs fall between $500 and $1,500, based on the state you're located in and how much money you're borrowing in your home loan. Location is the biggest factor in the cost of both lender and optional homeowner policies. Every state holds title insurers to a different standard. Some jurisdictions require more work from the insurer to verify the history of your title, raising the cost of providing the title policy.

While optional, homeowner's title insurance is generally more expensive than lender policies. You can pay anywhere from $700 to $2,000 on title coverage for yourself. Larger loan amounts, smaller down payments and lower credit scores can all raise the cost of title insurance. While you can save a considerable amount by skipping homeowner's title insurance, the policy never expires and can end up protecting you from issues that arise long after you sell the house and move on.

Finally, you may find it possible to negotiate with your seller and lender on the sharing of title insurance costs. While this is a matter of custom that varies by state, some jurisdictions expect the seller to foot the bill for a homeowner's title insurance policy that covers the buyer. In foreclosure sales, the lender holds the rights to the property and may be willing to cover the usual cost for your homeowner's title insurance. However, you may want to order a separate title search on a foreclosed property to verify that you're buying it free and clear of any competing claims.

Can You Choose Title Insurance?

You can choose your own title insurance company for both lender's and homeowner's title insurance, although few people actually do so. If you're considering purchasing a homeowner's policy for yourself, it makes sense to do your own shopping. Title insurers can often provide discounts if you purchase both sets of policies at the same time. There are four national title companies to choose from, along with dozens of smaller local insurers.

Major National Title Insurance Companies

  • Fidelity National
  • First American
  • Old Republic
  • Stewart Title

You can obtain quotes online from most of these major insurers by providing your mortgage information. Traditionally, title insurance was chosen by professionals involved in the mortgage process, such as realtors, attorneys and lenders. When buying a condo or house in New Jersey, for example, either the seller or buyer's attorney will have recommendations for title companies. However, the growth of Internet use has moved the title insurance industry towards a direct-to-consumer approach in recent years, making it easier for you to explore prices for yourself.

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