When the seller accepts your offer, the closing process requires verification that the seller is the sole owner of the home’s title. This is called making sure you have a “clean title” and no one else has a legal claim to the home. The title company does all the necessary research and legwork to assure the title is clean and the owner who sold it is the sole owner. If problems arise with the title during or after the closing process, your title insurance offers protection for the buyer and the lender. So, what exactly does title insurance cover, how much does title insurance cost, and is it actually required? We’ll get into that below.
What is title insurance for a homebuyer?
Your title insurance policy covers you through the entirety of the mortgage term. The policy insures against past events and the actions of previous owners. A title company researches all public records to identify potential ownership issues and works with the seller to correct the issues. Examples of these issues are liens or delinquent taxes. For the transaction to proceed and the sale to go through, the seller must pay to clean up any issues.
Based on information from the title search process, the mortgage loan underwriter will determine whether to insure the title. If it’s insurable, the next step is for the title company to issue a title insurance policy to both the buyer and lender.
How much does title insurance cost?
The cost of title insurance will vary with the location of the home and its purchase price. This one-time fee can range anywhere from $500 to $3,500. To see an estimated range for title insurance costs for a property you plan to purchase, check out this title fee calculator.
Is the buyer required to have title insurance?
Currently, title insurance is not a requirement in a real estate transaction. However, every lender requires the borrower to purchase title insurance for the lender as part of the home loan process, but an owner’s policy is optional. Most buyers choose to purchase an owner’s title insurance policy to cover them for the lifetime of the mortgage.
Without a title insurance policy, the buyer is directly responsible for any financial burden left behind by the seller. A way to protect against this risk is to include a clear title contingency in your offer. If the report finds liens or judgments, the buyer can require the seller to satisfy them before the closing date. If these items are not cleared before closing, this contingency allows the buyer to walk away from the deal.
What does title insurance cover?
A basic title insurance policy covers you for most of the common issues buyers come across, such as late utility payments or past due property taxes. An enhanced policy costs more and will cover additional items.
Title insurance covers title defects that could include:
- Undisclosed heirs
- Paperwork submitted under a false power of attorney
- Prescriptive rights – giving someone other than the property owner rights to use the land, not appearing on record and not disclosed by survey.
- False representation of the true landowner
- Improperly recorded legal documents
- Expired or improper notarization of acknowledgments- if the notary is found to have an expired notarization commission.
- Failure to include all parties to certain judicial proceedings
- Forged conveyance paperwork like mortgages, the satisfaction of mortgages, wills, deeds
- Gaps in the chain of title
- Deeds by minors
- Inadequate legal descriptions
- Issues with conveyances by undisclosed divorced spouses
- Conveyances by an heir or survivor of a joint estate who attempts to attain title by ill-gotten means
- Wills or deeds by parties without legal rights
- State inheritance and gift tax liens
- Problems with rightful possession of the land
- Demolition and substandard building liens
- Errors in tax records
- Deeds or mortgages by foreigners without legal rights to hold title
- Administration of estates or probate of wills of missing persons who are presumed deceased
- Rights of divorced parties
- Improper modification of documents
- Misinterpretation of wills and ancillary instruments
- Violations of public policy
- Claims by creditors of decedent against property
- Real estate homestead exemptions
- Forfeitures of property due to criminal acts
- Issues affecting rights of military personnel protected by the Soldiers’ and Sailors’ Civil Relief Act
- Interests arising by deeds of fictitious parties
- Issues concerning adopted children
- Utility easements
- Community property issues
- False affidavits of death or heirship
- Federal estate and gift tax liens
What isn’t covered by title insurance?
Title insurance policies can differ by provider. Coverage is determined by whether you buy a basic or enhanced policy, so it’s difficult to generalize about what might be not covered. Examples of things title insurance doesn’t cover:
- Failure to pay your mortgage is not covered.
- Discovery of radon, mold, or termites in the home after the purchase has closed – if you wait to test for known issues like radon, mold, or termites before the purchase closes and it is found afterward, it is not covered.
- Violation of zoning or building ordinances related to land use, improvements, or environmental protection.
- Discovery of problems with taxes and assessments.
- Discovery of restrictive covenants that limit the use of the property – if the previous owner had any restrictive covenants with a neighbor, the city, or county and you find out after the purchase closes, it is not covered.
- Discovery that the home is on condemned land.
What’s the difference between owner’s title insurance and lender’s title insurance?
Title insurance protects all of the parties involved in the sale and purchase of the home. An owner’s title insurance policy insures your ownership rights to the property. The coverage will last as long as you own the home; you pay for this policy once at the time of closing.
The lender’s title insurance policy protects against potential losses if the seller cannot legally transfer title rights. Such a policy protects only the lender and provides coverage for the mortgage amount. The policy protects from title defects such as liens or fraudulent acts which could prevent the mortgage from being valid. The policy also ensures the lender is in a first-lien position in the event of a default or foreclosure. If some problems are uncovered, they could hinder the owner’s ability to sell or the buyer’s ability to borrow.
How to save on title insurance
- Shop around. You’ll know if you can shop for a less expensive title insurance policy if the title services are listed on section C of page 2 of your loan estimate. If you see title services listed, you can contact other title companies to find the best deal. Keep in mind the title company is the primary party that will work on your behalf to fix issues. Ask friends and family, read reviews, and talk to your real estate agent for recommendations to find a title company with a good track record for customer service.
- Bundle policies. Some title companies will offer a discount if you bundle your owner’s and lender’s policies. If the title company does not offer to bundle the policies outright, it’s worth asking if they offer a discount if you buy both policies.
- Negotiate add-ons. You may live in a state where the title insurance fees are fixed. If that is the case, you can ask the title company if there is any wiggle room in other fees. There are always extra administrative fees built into the total premium and could be optional or discountable.
- Negotiate with the seller. Who pays for various closing costs is open to negotiation. As the buyer, you could ask the seller to pay for the title insurance to close the deal and may get a concession if you are dealing with a motivated seller. However, don’t be surprised if you hear a “no” in a competitive real estate market.
Can I buy title insurance after closing?
You can buy an owner’s title insurance policy after closing. The risk in doing so is that you’ll have a gap in coverage when buying a policy after the closing. Typically, it takes 10-14 days to issue a policy. Bear in mind that if anything happens between the closing and the activation of the policy, you will not be covered.
How to get title insurance
You can shop for any services listed on section C of page 2 of your loan estimate. Title services are the highest costs in this category, and in most cases, you’ll be able to shop for them. Ask your lender for a list of companies that provide the services listed, or your lender might agree to work with other providers. It’s also important to consider that title companies often form cooperative relationships with lenders, meaning the title company the lender chooses may not be the least expensive for the buyer.
Unlike auto, homeowner’s, and life insurance — where you pay monthly or semi-annually for coverage — title insurance is a one-time cost that protects you for the lifetime of your loan. While title insurance can seem like a high cost, it can bring peace of mind to protect your investment.