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Title insurance is one of many things your closing attorney will go over at the loan closing. While it can seem overwhelming buying your first home and going over so many closing documents at one time, it will help if you prepare ahead of time.

If you haven’t already heard of title insurance, you will as you close on the mortgage for your first home.

Title insurance is one of many things the real estate closing attorney will go over at the loan closing. While it can seem overwhelming buying your first home and going over so many closing documents at one time, it will help if you prepare ahead of time. So, what is title insurance?

What is title insurance

KEY TAKEAWAYS
  • Title insurance is coverage that protects property owners and lenders from title defects and ownership issues.
  • Lenders title insurance is required by most lenders and is paid for by the property buyer, but only provides protection for the lender.
  • Owners title insurance is not required by most lenders, is paid for by the property buyer and provides protection to the property buyer.
  • Fidelity National, First American, Stewart Title and Old Republic are the most common insurers in the title insurance market.
  • Title insurance policies typically range in costs from $500 to $3,500.

Title insurance defined

Title insurance: a type of coverage that protects real estate owners and lenders from losing their property due to liens, any defects in the title to the property or from "encumbrances" in the title.

During the mortgage process, lenders require a title search from a title company.

To fully understand how title insurance works, you'll need to know some other important definitions.

Title: a concept of property ownership, similar to a vehicle title.

If you have the title to a property, that means you have legal ownership of that property. When you are purchasing a property, the seller has the title to the property until the mortgage closes.

Deed: a physical document that shows the transfer of the title (or ownership) from seller to buyer.

The title or legal ownership of the property is very important when it comes to buying a new home or land. This is why you and the lender must ensure the title is clear, or void of any issues that might interfere with the transfer of ownership. This is where title insurance protects you and the lender.

How does title insurance work

When it comes to the lender's title insurance, the mortgage company will begin the process of getting the title insurance soon after you’ve begun the loan process. There are two steps in the process of getting title insurance once a company has been chosen:

Step 1: Select a title insurance company

Most often, your lender chooses the title insurance company. However, if you plan to also purchase owner's title insurance, it may be worth mentioning that to your lender. If both policies can be purchased through the same title insurance company, you may get a better deal on both.

If you decide to shop for your own title insurance, start by requesting quotes from at least three insurance companies. When reviewing the quotes, be sure each company has quoted the same coverage.

Next, review the company’s financial strength on A.M. Best, their reputation on JD Power and Associates and the National Association of Insurance Commissioners, and ask for references from family, friends, and acquaintances.

Step 2: Title search

The chosen title insurance company will do a title search to confirm that the property you want to buy is being sold by the official owner and that there are no other apparent defects.

Step 3: Title insurance underwriting

Next, the title insurance will go to underwriting where underwriters will do a deep dive to discover any previously unknown issues with the title. This is how they will determine if they will offer you a policy and what the rate will be.

Step 4: Title insurance policy

Once you (or your lender) have reviewed the title insurance quote and made your decision, the insurance company will send over the policy for your review and signature. Be sure to communicate with your lender throughout this process to ensure you are meeting all requirements for closing.

Once the mortgage closes, your new title will be sent to the mortgage company. Since this mortgage company has paid for your property, upfront, they will keep the title until you have paid them back. When you pay off the loan, the title will be sent to you

Types of title insurance

There are different types of title insurance, and understanding the differences is essential.

Lender's title insurance

The lender's title insurance policy protects the lender against loss in the event there are title defects. This is the most common type of title insurance that lenders require before closing a mortgage. The lender's title insurance policy typically lasts until the mortgage is paid in full. Although most lenders will do a formal title search as part of the mortgage process to look for red flags, lender's title insurance gives them some extra protection against loss.

Owner's title insurance

This type of title insurance covers the owner in the event there are title defects. Remember, lenders title insurance only protects the lender. That means if there is an issue with the title, the lender is protected from financial loss, but without owner's title insurance, you are not.

Owners title insurance is the owner's policy and is valid for as long as you (or your heirs) hold title to the property. Owners title insurance is typically optional and left up to you, the owner, to get if you want it.

What does title insurance cover?

If there is a dispute during the title transfer of ownership, title insurance comes into play to provide protection for financial loss. So, what kind of real estate title defects should you be aware of? Here are some issues title insurance provides coverage for:

  • Filing errors: this could be an error in public records, for example, if the square footage of a home is listed incorrectly in public records.
  • Title forgeries: if it is discovered that your title has a forged signature, this could cause ownership issues.
  • Conflicting or undiscovered wills: if in an undiscovered will of a previous property owner, the property was willed to someone else, your ownership could be in jeopardy.
  • Liens: liens are often placed on assets when there is unpaid debt from a previous owner. The lien is placed on the property, not the person and carries on with the property regardless of who owns it.
  • Undocumented easements: this can happen if there are access areas on your property that someone (often a utility company) has the rights to use.

What do these issues mean for you? Let’s say you purchase a new home and later find out there are liens against the property for $20,000. There is a lender's policy but you decided not to get an owner's policy. As the new owner of that property, you may be responsible for paying off the lien and any other fees associated with the issue. Any legal fees associated with this issue will be paid for by you. And in a worst-case scenario, you may even have to forfeit the property.

Now, let’s assume the same scenario happens but this time you’ve got an owner's title policy. Your title insurance policy should cover the liens, your legal fees, and even compensation if you have to forfeit the property.

Needless to say, title insurance is an important protection against financial loss for both the property owner and the lender.

How much is title insurance?

The title insurance cost varies by a variety of factors including state, property location, property purchase price, and type of coverage. Title insurance policy costs typically range from $500 to $3,500.

In most states, title insurance companies set their own rates, and then it’s up to you to shop around. In those states, insurance rates are regulated to ensure that rates are not either too low or too high but rates can still vary significantly from company to company. There are also some states that determine what title insurance rates will be and everyone must charge the same rate.

Who pays for title insurance?

Whether lender's title insurance, owner's title insurance or both, the cost is typically the responsibility the buyer. But the good news is that you may be able to negotiate for the property seller to pay all closing costs, including title insurance. 

Is title insurance a one-time fee?

Yes. Once the title insurance premium is paid, the policy remains in place as long as you own the home. If you sell the home, the buyer will need to purchase their own title insurance.

Where to buy title insurance

You can also choose to shop for title insurance on your own. There are four major insurance groups that dominate the title insurance market:

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

These four groups make up close to 90% of the market. That doesn’t mean there aren’t others. There are. But this gives you a great place to start.

Final thoughts: Do I need title insurance?

If you are buying a home or property, title insurance is an important part of protecting yourself from financial hardship. Don’t forget that the title insurance you’ll pay for through your mortgage lender will most likely only be the lender's title insurance and will not protect you in the event there is an issue with the title. To lower your risk of financial loss, consider an owner's title insurance policy, too.

In addition to title insurance, homeowners insurance is another very important type of insurance you will need. Title insurance insures your title while homeowners insurance insures your home and your personal possessions. Homeowners insurance rates vary by state, company, property type, age of home, coverages selected and several other factors.

When deciding what types of homeowners insurance coverage you’ll need, be sure to consider the worst-case scenario and make sure you buy a home insurance policy that will adequately cover your house and personal items and not leave you underinsured.

Whether title insurance or homeowners insurance, the essence of insurance is to protect you from financial loss when the unexpected happens.