The Lowdown on Title Insurance

When purchasing a home with a mortgage, your lender likely will require you to buy title insurance to guard against the possibility that someone else might have a claim on your property.

 In essence, it ensures that a homeowner and their lender will be alright in case the seller or previous owners didn’t have the absolute ownership of the house. Here, 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?

This policy means you and your mortgage lender are protected against any financial loss or title issues due to liens, disputes between previous 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 future legal troubles. 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, the title insurance policy will cover the costs of resolving the issue.

Why a title search is required with a mortgage

When obtaining a mortgage to buy real estate, your lender will typically require you to get a title search before closing the deal with the 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:

• Disputes between previous 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 instance, if a group of heirs isn’t able to get a holdout to agree to sell the home, it’s possible that someone will forge a signature on a quit-claim deed.

Although 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 vs. owner’s title insurance

There are two types of title insurance: lender’s and owners. Almost every lender will require you to pay for a lender’s title insurance policy, which protects the lender (not you) from incurring any costs if a title dispute arises after closing. Owner’s title insurance is usually optional, but it’s highly recommended. Without it, you’ll be left paying all of the costs associated with resolving a title claim. 

That could be thousands or even hundreds of thousands of dollars. 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 happen 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 from state to state and depends on the price of your home. Title insurance premiums can range from a couple of hundred dollars to a couple thousand dollars. 

Some factors that can affect the cost of your premium include the title search, examination and expected cost of any title defects. California has unfixed premiums, which means that buyers can shop around. 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 might 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 title research already completed.

How to save on title insurance

There are some ways to lower your title insurance costs. 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. Some companies will offer a discount if you bundle your lender’s and owner’s policies. Even if the premium 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. Finally, 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.

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