Looking to buy your first home? If so, you’re probably familiar with mortgage insurance and traditional home insurance. Just like car insurance or life insurance, traditional home insurance protects you from the what if’s: unexpected home expenses due to fire, flood, natural disaster, and more. But as a homebuyer, traditional insurance isn’t the only type of insurance you’ll need to invest in.
Title insurance is one of the lesser known home insurances involved in purchasing a house. If you’re interested in learning more about title insurance, read on for everything you need to know. Or, use the links below to jump ahead to the section of your choosing.
- What is title insurance?
- What does title insurance cover?
- Do I need title insurance?
- How to purchase title insurance
- Title insurance FAQs
What is title insurance?
A title insurance policy is a type of property insurance that’s involved in purchasing any property, such as a home. You may be more familiar with the term “title” when it comes to car ownership. Just like with a car, the title to a home is a document that shows legal ownership of the home. When a home is sold, the title of the home is transferred over to a new buyer.
In order for a title to be transferred, it must be “clean”, meaning there are no outstanding debts or liens on the property. If there is a debt or a lien, the title is considered “dirty”, as the creditor to whom the debt is owed essentially has finances invested in the home and can claim legal ownership over it. This is where you, as the new homeowner, can run into issues.
Title insurance is an insurance policy that protects you from any issues associated with the title of the property you are purchasing. When you buy title insurance, a title company will first perform a search on your prospective home to insure that there are no outstanding issues on the home’s title. If there are, the company attempts to fix it. Once any issues are remedied, they will provide you with a title insurance policy.
What does title insurance cover?
You may be wondering, why do I need title insurance after all issues with the title of my home have been remedied? The answer is that, while titles are public record, they’re also extremely complex and can have a number of hidden issues. Those may include things like:
- Filing errors during past ownership transfers
- Undocumented easements
- Claims to ownership of the property by another party, such as a conflict in the wills of the former homeowners
- Unpaid taxes, assessments, judgements, or liens that are missed
- Forgery or fraud
Your title insurance policy will protect you from expenses or legal trouble in the event that these errors and more are uncovered down the line. It’s a one-time payment that protects you from any past issues that may come up in the future.
Types of title insurance
Title insurance is broken down into two main categories: lender’s title insurance and owner’s title insurance. Let’s take a look at what each of those types of title insurance means.
Lender’s Title Insurance
If you’re borrowing from a lender to purchase your home, they’ll almost always require you to buy a lender’s title insurance policy. This type of title insurance policy is designed to protect a lender in the event that a claim is made to the ownership of your home down the line.
Here’s why that’s necessary: when you purchase your home with funds borrowed from a lender, they are essentially becoming owners of your home, and you are buying it from them slowly, over the course of time, in the form of mortgage payments. If a person suddenly claims ownership to the home, without a title insurance policy, it is the mortgage company’s money on the line, as that’s the money that’s invested in the home. A lender’s title insurance policy puts the responsibility in the event of a title issue into you, the borrowers, hands, instead.
Owner’s Title Insurance
While the lender’s title insurance policy protects the lender in the event of a title issue, owner’s title insurance protects you. Your owner’s title insurance policy will protect you from financial loss incurred from a valid claim to your property up to the full price you paid for your home plus legal fees, according to the terms of your specific policy. Not every owner’s title insurance policy covers every title issue, so be sure to review the types of claims that it does cover.
Do I need title insurance?
Yes! Even if you’re not borrowing from a lender, title insurance is a must for any responsible homeowner. A home is an enormous investment, potentially the largest you’ll make in your life. Without a title insurance policy, a single error in your home’s title can leave you suddenly many thousands of dollars in debt, and in the worst case scenario could leave you without a home. Imagine, after all that time and effort you spent saving for a house, being left with nothing. A title insurance policy is a one-time payment that can protect you from such a major loss.
How to purchase title insurance
You can purchase title insurance from a licensed title insurance company, agency, or agent. There are plenty of ways to find a title insurance company, including:
- Ask for recommendations from friends or family
- Ask the former owners who their title insurance policy was through
- Do an online search for companies in your area
- Ask your realtor or mortgage lender
Most lenders will offer you title insurance from the title insurance company that they are associated with, but they may have ulterior motives in their sale. Both mortgage lenders and realtors may have arrangements with title insurance companies and make commission off of your purchase from their company. They are required to tell you if this is the case, so be sure to ask. Remember that you have the right to shop for title insurance and protect it from whichever company you choose, and you’d be wise to take advantage of it.
How much does title insurance cost?
The cost of title insurance is contingent upon the value of your home and varies from state to state, but it typically isn’t a huge percentage of your total home value. For instance, title insurance on a $500k house in California may cost around $1,550, while in Florida, the cost on the same house may be $2,575.
According to consumerfinance.gov, it’s a good idea to purchase both your owner’s policy and your lender’s policy from the same title insurance company, as your policy cost is often lower if you purchase them together rather than from separate entities.
Title insurance FAQs
Q: Who pays for title insurance?
A: When it comes to the owner’s title insurance, there’s no set rules regarding whether the buyer or the seller is responsible for paying the cost of title insurance. In many cases, the buyer will negotiate into their purchasing contract that the seller is responsible for the cost of the owner’s title insurance policy. However, this isn’t a standard; many owners are responsible for their own title insurance policy. In terms of the lender’s title insurance, it is always the borrower (aka the buyer) who pays for the insurance policy.
Q: What is the difference between title insurance and homeowner’s insurance?
A: Homeowner’s insurance is there to protect you from any problems that may occur in the future, such as a fire or a flood, damage incurred from a natural disaster, and much more. Title insurance, on the other hand, is there to protect you from something that has happened in the past, that hasn’t yet revealed itself. Although the cost of the issue will be incurred in the future, the cause of the issue has already happened.
Q: How long does title insurance last?
A: Title insurance lasts as long as you own your home. Although it is a one-time payment, it lasts for the entire length of your ownership.
Q: Can title insurance be transferred to a new owner?
A: Title insurance cannot be transferred. It is your specific policy throughout your ownership of the home. If you do choose to sell your home, a new title insurance policy needs to be drafted and paid for by the home’s new owners.
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