Buying a home often entails also buying various types of insurance to protect your property, and one type you might need to get is called title insurance.
When you buy a home, you “take title” to it and establish legal ownership. A title insurance policy protects you against the possibility that someone else might have a claim on your home. In essence, it ensures that a homeowner and their lender will be okay in the event that the seller or previous owners didn’t have absolute ownership of the house. (It sounds crazy, but sometimes it turns out that the homeowner is not the only one with rights to a home!)
If you need a mortgage to buy real estate, your lender will likely require you to buy a title policy from a title insurance company. Although it’s a cost home buyers incur, getting a title policy from a title insurance company is critical to establishing peace of mind.
Let’s examine the ins and outs of title insurance, why home buyers need it, how much you can expect to pay, and how you can save on a title insurance policy.
What is title insurance?
Holding a title insurance policy means you and your mortgage lender are protected against any financial loss or title issues due to liens, disputes between prior owners over wills, clerical problems in courthouse documents, or fraudulent claims against the property or forged signatures.
A title search will be performed by your title or settlement company to uncover any issues with your title that could give you legal troubles down the line.
The title company then insures your claim to the property’s title. If anything is missed during the search or there are lawsuits questioning your legal ownership of the property after closing, your title insurance policy will cover the costs of resolving the problem.
Why a title search is required with a mortgage
When getting a mortgage to buy real estate, you’ll find that most lenders will typically require that you get a title search before you close the deal with your escrow company. Basically this would mean you’ll have to hire a title company to search local records on your property. Some of the issues they’re looking for include the following:
- Disputes between prior owners over wills: If your property was inherited and then sold by the heirs, there could be other heirs contesting the will and claiming ownership of your property.
- Liens for unpaid property taxes.
- Liens for contractors who worked on the home but were never paid.
- Clerical problems in courthouse documents: Believe it or not, a simple typo can lead to title claim problems.
- Fraudulent claims against the property or forged signatures: For example, if a group of heirs can’t get a holdout to agree to sell the home, it’s possible that someone will forge a signature on a quit claim deed.
While most homeowners will never need to use their title insurance, its existence offers protection against a potentially aggravating—and very expensive—financial loss.
Lender’s title insurance vs. owner’s title insurance
There are two types of title insurance: lender’s and owner’s. Almost every lender will require you to pay for a lender’s title insurance policy. This protects the lender—not you—from incurring any costs if a title dispute pops up after closing.
Owner’s title insurance is usually optional, but it’s highly recommended. Without it, you’ll be left footing the bill for all the costs of resolving a title claim, which could be thousands or even hundreds of thousands of dollars. Even though it can feel like you’re hemorrhaging cash when you’re closing on a house, a title insurance policy is one of those things that can save you money in the long run.
“When you consider the benefits of title insurance and some of the unique aspects of title insurance relative to other kinds of insurance, it is clear why it’s risky and ill-advised to purchase real estate without a title insurance policy,” says Brian Tormey of TitleVest in New York City.
You can purchase basic or enhanced owner’s title insurance, with the enhanced insurance policy offering more coverage for things like mechanic’s liens or boundary disputes.
While your title insurance covers you for things such as mistakes in the legal description of your property or human error, be aware that it will have some exclusions—particularly in cases where violations of building codes occur after you bought your home.
How much does title insurance cost?
The average cost of title insurance is around $1,000 per policy, but that amount varies widely from state to state and depends on the price of your home.
Title insurance premiums can vary from a couple of hundred dollars to a couple of thousand dollars. Some factors that can affect the cost of your premium include the title search, examination, and expected cost of any title defects.
“In general, each policy price is based on the purchase amount of the home or the total amount of the loan,” explains Tormey. “Title insurance is a highly regulated industry, so title insurance policy types and costs will vary from state to state. Each state’s Department of Insurance can provide information on the pricing regulations in their state.”
In some states such as Texas and Florida, title insurance premiums are fixed by the government, so you will pay exactly the same amount no matter what. Other states such as California and New Mexico have unfixed premiums, which means that buyers can shop around. Iowa actually underwrites the insurance itself, resulting in the lowest premiums in the country: $110 for properties costing up to $500,000.
Unlike other types of insurance, a title insurance policy is paid with a single premium during escrow while closing for your mortgage. If you’re buying a real estate resale or refinancing, you may be eligible for a “reissue” rate, which could offer a substantial discount off the regular premium—because the title policy is already in effect, and the title research has already been completed.
Here’s a calculator that can help you figure out the cost for your area and purchase price.
How to save on title insurance
In some states, title insurance premiums are the same no matter who you work with, but in the majority of states, you can save money by shopping around. Even in states with highly regulated title insurance industries, there are ways to save. Here are some ways to lower your title insurance costs.
- Shop around. If premiums are unregulated in your state, find the company that offers the best deals. Just make sure you’re not sacrificing customer service to save a few dollars: Resolving a title issue can be stressful, and you want a company that will help you through the process. Read reviews and talk to your real estate agent for recommendations.
- Bundle. Some companies will offer a discount if you bundle your lender’s and owner’s policies.
- Negotiate add-ons. Even if the premium itself is fixed, there are almost always other fees built into your total premium price. See if there is any wiggle room with those items. They may be optional, or the insurance company might be open to discounting them.
- Negotiate with the seller. Closing costs are always open to negotiation, and picking up the tab for the title insurance might be worth it to a seller who’s highly motivated to close the deal. But be wary of using this tactic in a competitive market.
Michele Lerner contributed to this article.
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