Title insurance is a form of insurance homeowners are required to purchase in nearly all purchase and refinance transactions. Unlike other forms of insurance, title insurance protects borrowers and lenders from issues that occurred in the past, rather than issues that may arise in the future. It protects both mortgage lenders and owners against past defects or problems with the legal ownership of a property, including things like forged documents, lien claims, undisclosed easements, ownership claims made by others and mistakes from the previous title agency.
Two Types of Title Insurance: Lender (Mortage) & Owner
A mandatory lender’s policy that covers the lender, i.e. the mortgage company, and an optional—but highly recommended—owner’s policy that covers the homeowner. Like they sound, the lender’s policy only protects the lender in the amount of the loan, while the owner’s policy protects the owner from any potential legal issues that may come up relating to the ownership of the property. In addition, the lender’s policy expires once the mortgage is paid off. Both types of policies are typically offered as a bundle together.
Title Insurance Provides Protection
- You bought your house last year from a seller who inherited the property. However, you find out later that the seller has an undisclosed step-brother who also owns half of the property, according to the will. In this case, title insurance would help you offset the legal costs of challenging his claims to your property.
- You bought a house, but it turns out that the seller had an overdue bill on a previous home addition. Now there’s a contractor’s lien on the property from several years ago that predates your mortgage. Without title insurance, you’d be held liable as the current homeowner.
- Part of your property turns out to be inaccessible due to a mistake by a past surveyor. Your property records are different than expected and the value of the home is affected as a result. Without title insurance, you wouldn’t be compensated for the financial loss.
What’s the Cost?
Title insurance is a percentage of your purchase amount and is regulated on a state-by state basis. The cost is called “title insurance premium,” and is a one-time cost paid at closing. Settlement service fees include the fees incurred during closing such as the cost of escrow, wire fees, activities involved for underwriting the title insurance policy—such as the title search fee and the cost to resolve issues. Settlement service fees also vary by state, usually under $1,000.
Cost aside, title insurance can potentially help you avoid a financial nightmare and legal battle later. It is truly an investment that no homeowner can afford to do without.