Homebuyers

What is Title Insurance? And How Can It Save You Money in The Long Run?

If you’ve ever bought a home before, you’ve probably dealt with title insurance in some form or fashion. Maybe you even closed on your home at your title insurer’s office. But what exactly is title insurance and why is it important?

Imagine this. A contractor who worked a decade ago on the house you’re buying filed a lien, a legal claim that gives him a right to your property until the old debt is paid. Or long-lost relative comes forward, insisting he has an ownership stake in the house you just bought. Or your cranky next-door neighbor is threatening a lawsuit over a property line dispute.

Each of these nightmare scenarios could spell disaster for your home purchase or make it impossible to enjoy living there. In some cases, you may actually have to vacate the home or pay thousands (or even hundreds of thousands) of dollars to fix someone else’s mistake.

That’s where title insurance comes in.

What exactly is title insurance?

Officially, title insurance is “a policy that protects your legal right to own, use, control, and dispose of land,” said Helen Johnson, business development professional for Texas-based Providence Title.

“Title insurance guarantees that if a future claim against the title to real property results either in the loss of title to the property or expenses to clear up title defects uncovered by such claims, title insurance will provide compensation up to the face amount of the policy,” Johnson said.

What that means is this: Title insurance offers protection to you, as buyer and owner, and the mortgage lender, should there be an issue with the title to your home during and after your purchase.

How does title insurance work?

The title policy is usually ordered right after you sign your purchase agreement for the home. The company, which may be chosen by you but is usually selected by your mortgage company, does a comprehensive search for title defects.

They look at public records and property databases to uncover any issues that could delay the transfer of ownership from the seller to you. It typically takes between 10 and 14 days to clear title, if no issues are found. If there are issues, the title insurance company gets involved to resolve them.

It’s also important to know that there are two types of title insurance policies, one for lenders and one for homeowners/homebuyers.

Lender’s policies and owner’s policies

“The lender’s policy is required for a mortgage, financially covers the amount of the loan, and provides protection to the lender,” said Johnson. “An owner’s policy protects the landowner against any title loss, which ensures the value of the property.” 

A lender’s policy will typically cost .5% to 1% of the loan amount, according to the American Land Title Association.

An owner’s policy is not technically required, although it’s uncommon for buyers to go without because that exposes you financially. Without an owner’s policy, any costs involved in fixing title defects will fall to you.

That includes research, document preparation, lawyers, and court fees when needed. The typical owner’s policy will run you .5% to 1% of the property’s purchase price. You’ll pay for you title policy upfront as part of your closing costs.

How does an owner’s policy help me?

If you’ve been scraping together every dollar just to get a down payment together, the idea of saving several hundred dollars may sound appealing. In fact, about 25% of buyers go without one.

But there are risks associated with not getting title insurance.

Here are a few examples of title defects that could cost you:

A previous owner failed to pay a Homeowner’s Association (HOA) fine. It was only $50 to start, but it grew and grew the longer the owner refused to pay. Then the HOA changed management companies, and the documentation disappeared. Now that the home is changing hands again, the paperwork has reappeared, and the HOA wants its money. Luckily, the title insurance company is there to clear the debt so you can proceed with your home purchase.

Someone other than a long-lost relative says they own the property. A former spouse, an unknown heir, or someone named in a will just filed an ownership claim on your home. If it was proven the individual did own the home, the lender would be protected by their title policy, but without an owner’s policy, you’d be out the court costs, moving fees, and any other financial losses.

There are unpaid real estate taxes. An old, delinquent tax bill could have slipped through the cracks. This is another type of lien. Once the bill emerges, you can bet the government will come calling. As the current owner of the home, you’re liable — unless you have an owner’s policy to pay the taxes. There could also be a lien from a bank or personal injury claim. Liens are the most common title defect, and they’re dangerous because if the creditor isn’t paid, you can be forced to sell the property to clear the debt.

There was fraud. Someone could have impersonated an owner to forge their name and sell the property for profit. This would likely end up in court once the error is discovered, and the owner’s title would cover your legal fees.

Each of these situations could be remedied by having a title insurance policy. Make sure you talk to your real estate agent and loan officer about title insurance and how it can help you avoid any unpleasant complications from buying a home.