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Although there seems to be no shortage of extra fees and expenses when it comes to buying real estate, there’s definitely one you don’t want to skip out on: title insurance. Title insurance protects property owners and mortgage lenders from issues that can arise from the improper transfer of real estate. When real estate is not transferred properly, someone else could claim ownership to part or all of your property’s equity.
As you can see, there’s a lot at stake if you opt out of this insurance. Keep reading to learn more about title insurance and why you should consider adding it to every real estate transaction to protect your ownership interest in a property.
What is title insurance?
Before answering this question, it’s important to understand what a property title is. A property title proves that someone has free and clear ownership rights to a property. Here’s an example that may help you understand what a title is and how title insurance works.
Suppose an elderly man passes away intestate (without a will) with no children to inherit his home. Depending on his state’s laws of succession, his property may be awarded to his siblings.
Let’s say he has five siblings, but only one agrees with and signs off on the sale of the property. Technically, this single sibling doesn’t hold ownership rights to the property on his own, so he alone can’t make decisions about the property. The other heirs should be on the chain of title, with ownership rights, and treated accordingly.
If you purchase that house without all of the heirs consenting to the sale, the transfer would not be properly done. This is called a defective title or a cloud on the title. The descendants’ siblings could (rightfully) come to you one day and claim ownership of the property, which you may have to resolve with lots of money!
Title insurance would cover a scenario just like this. If you have to pay legal fees to fix the situation, the title insurance would kick-in. Otherwise, when it’s time to sell or refinance your home in this situation, you would not have a clear, marketable title and could be unable to do so.
Inheritance claims aren’t the only issues that can cause title defects. Here’s a list of some common title problems that can put your ownership claim at risk as stated by the Land Title Association of Mississippi:
- Improper execution of documents.
- Mistakes in recording of legal documents.
- Mistakes in the indexing of legal documents.
- Mistakes in legal descriptions of property.
- Forgeries and fraud.
- Undisclosed or missing heirs.
- Unpaid taxes and assessments.
- Unpaid judgments and liens.
- Unreleased mortgages.
- Incorrect interpretation of wills.
- Mental incompetence of grantors of property.
- Impersonation of the true owners of the land by fraudulent persons.
- Fraud in securing essential signatures.
- Refusal of a lender to provide financing based upon the condition of title.
- Refusal of a potential purchaser to accept title based upon the condition of title.
If you are financing a home, a lender will usually require you to get this insurance because they need to protect their rights to the property as well. (We will cover the difference between lender’s and owner’s title policies below).
What does title insurance cover?
If a problem arises due to a title defect, you’ll likely have to spend money to resolve it. This may include paying off any liens, back taxes, or ownership claims to the property. Title insurance can cover the costs of lawsuits attacking the title or, in the case of a covered loss, reimburse you up to the policy limit.
What does title insurance not cover?
Title insurance is not like homeowners insurance or a homeowners warranty. It doesn’t cover damage to your property from incidents like fires or natural disasters. If an appliance or system in your home breaks down, title insurance will not cover repairs or replacement.
Title insurance also doesn’t cover events that take place after the policy is issued or circumstances that you know about. For instance, if you grant a drainage easement to someone or some entity and change your mind about it, your title insurance will not cover the cost of terminating it. If you fail to pay your mortgage or taxes, your title insurance won’t defend against those claims, either.
To get a full understanding of what’s not covered, be sure to read the exceptions and exclusions section of your title policy.
How is a title insurance policy created?
Title insurance is created by a title insurer, which works with a network of attorneys and other professionals to conduct due diligence on a property's title. This process includes searching public records for any liens or encumbrances against the property, verifying that all transfers have been properly executed, and ensuring that separate ownership rights are not disputed.
Once all of the title’s requirements are met, a title insurance policy is issued to protect both the lender and the borrower against any legal action taken due to an issue with the title.
Types of title insurance policy types
There are two types of title insurance policies. One for the owner, typically the entity buying the property and one for the bank financing the purchase.
Owner title insurance
An owners title policy covers the owner of the property. This title insurance will protect the owner in case there are claims against the property’s equity due to some of the issues stated above.
Lender title insurance
A loan (or lender) title insurance policy protects your lender. When you are getting a mortgage to purchase a property, a lender wants to make sure there are no other ownership interests, liens (monies owed), judgments, or other mortgages that have priority over the mortgage the bank is underwriting for you. The lender wants to be the first lien so they can have rights to your property if you default on your mortgage payments.
A cash purchase would not require a lender’s policy title. However, you can still get an owner’s policy to protect yourself as a cash buyer.
Who is it for?
Title insurance is for both the property owners and mortgage lenders to protect them from unforeseen legal claims.
Where do I buy title insurance?
You’ll get title insurance from your closing agent, which is typically a title company or lawyer. A representative from the title company may reach out to you once they receive the purchase agreement for your home.
They will review your options and help you choose coverage if you decide to get it. In some cases, your home loan may require an owner’s title insurance policy, in which case the title company will add this to your closing costs and settlement statement.
What are the costs of title insurance?
Title insurance depends on the value of the property, the type of title policy being purchased, and other factors. As a general rule, title insurance premiums are calculated as a percentage of the purchase price or loan amount. In most cases, the owner’s policies will range from 0.5% to 1% of the purchase price, while lender’s policies usually cost around 0.25% of the property's purchase price.
Note, the Title Insurance Rate Service Association (TIRSA) is an organization that serves as a reference for title insurance rates. All title insurers must follow the TIRSA guidelines when setting their prices and policies, so that title insurance services are consistent across different companies.
Additionally, the TIRSA works with state insurance regulators to develop and update industry standards related to title insurance. So you’ll find that most of the prices for title insurance will be based on the state regulations where you are buying property.
Who pays for title insurance?
The exact amount each party in the transaction pays depends on local real estate laws and regulations—so a buyer or seller could be responsible for the costs. In some cases, buyers may be able to negotiate with sellers, so they pay part or all of the title insurance premium.
How does title insurance differ from other insurance?
Unlike many types of insurance, you only pay a one-time title insurance premium that covers you for as long as you own the property. It also covers your heirs. There are no recurring costs, like a monthly premium, to keep your title policy active.
Another distinction to note is that title insurance covers events that happened before you purchased your home, not after. Most insurance protects you against future incidents, while title insurance is for past events that pose a risk to your free and clear ownership claim to your property.
Title insurance providers
Each state has a regulatory agency that oversees title companies. It could be a department of financial and professional regulation, consumer finance, or a department of insurance.
To find a list of title insurance agents, visit the website regulatory agency state where you are purchasing your property and search for active title agents licensed to do business in the state.
Frequently asked questions (FAQs)
In which situations are insurance premiums lower?
If you are buying both an owner’s and lender’s title policy, known as simultaneous issues, a discount applies. In some cases, you may also pay a lower premium on a refinance loan or subordinate mortgage. However, terms and conditions apply.
Is title insurance required in Washington State?
Yes, title insurance is required in Washington State when a home or other real estate property is purchased or refinanced.
How much is title insurance in NYC?
Title insurance varies based on a number of factors. In most cases, the owner's policies will range from 0.5% to 1% of the property’s purchase price, while lender’s policies usually cost around 0.25%.
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