Do You Need Title Insurance When Buying A Home?

When trying to buy a home, you will probably have to decide if you want to buy title insurance. Getting title insurance is one of the standard steps home buyers take before closing on a home purchase. This type of policy is not the same as homeowners insurance or private mortgage insurance. Title insurance is crucial for a home buyer because it protects you and the lender from the possibility that your seller doesn’t — or previous sellers didn’t — have free and clear ownership of the house and property and, therefore, can’t rightfully transfer full ownership to you. Even though the chance of calling on the insurance for coverage is relatively low, the value on what you stand to lose if you go without coverage is high — you could, in fact, lose the house itself. If you don’t know how title insurance works or whether it’s right for you, here’s what you need to know:

What Is Title Insurance?

Before you can close on a home, the closing attorneys should do a title search. A title search makes sure there aren’t any existing liens or zoning restrictions on the property. This involves looking at deed, tax and court records to verify ownership history. Title insurance is a special type of indemnity policy. It protects your financial interests just in case there’s a defect with the property’s title.

When you buy a title insurance policy, the title company may conduct its own title search. They do this to make sure there are no legal issues around the property’s ownership. Typically, you pay a one-time premium for this service at closing. Your policy is good for as long as you or your heirs own the home. If you have an issue with the home before or after closing, your policy covers you against any losses.

What It Protects Against

Title insurance coverage usually depends on whether you have a lender’s or an owner’s policy. Generally, you need to buy a lender’s policy if you take out a loan from a public mortgage lender. It covers the lender up to the amount of the loan in the event that any problems arise with the home’s title after financing. A lender’s policy usually stays in effect until you pay off your loan, sell the home or refinance.

An owner’s policy is often issued for the amount you paid for the home. It covers a broad range of problems that may arise. This includes tax liens, deed errors or omissions, forgery of deed documents, fraud and mistakes in the public record. It also covers you if any previous owners’ unknown heirs show up to make a claim on the property.

Some owner’s policies will also offer extended coverage. These protect against things like building permit violations, zoning law violations, certain types of structural damage and inaccurate surveys. If someone sues you or your lender due to a title problem, both policies cover any legal costs or losses. These costs or losses include your down payment, principal payments or the cost of any improvements you’ve made.

Is Title Insurance Really Worth It?

What you pay for title insurance will vary based on where you live and the policy itself. For example, a lender’s policy may cost around $2.50 for every $1,000 of coverage. An owner’s policy may cost a little bit more. Depending on how much your home costs, title insurance could run anywhere from a few hundred to several thousand dollars. If you can see someone suing you later, it may be a small price to pay for peace of mind.

Here’s how things could go wrong. At the most extreme, the seller may knowingly try to sell you a home he or she doesn’t own. There have been instances of renters posing as sellers. However, typical title issues are less worthy of a crime show, but more complicated. For example, the seller might have co-purchased the house ten years ago with a brother he hasn’t talked to since and is unaware that he now needs his brother’s signature to sell. Or a problem might be lurking in the more distant past. For example, the seller might have bought the place from a single woman, not realizing that her ex-husband still co-owned the property and hadn’t signed off on the sale as required. Or the seller might have inherited the house under the terms of a will that — oops — turns out to have been out-of-date and a more recent will leaves the house to someone else.

Not all title problems involve the whole house. For example, liens may have been filed against the house — that is, people or agencies may have, within the public records, legally claimed the right to be paid from the proceeds of the property’s sale, in order to settle the owner’s debt to them. Typical debts include taxes, child support, and contractor’s fees. These liens stick to the house like glue, until the house is sold or foreclosed on.

In any of these situations, title insurance will step in to help. One important note on co-op housing: If you’re buying a co-op, where you won’t actually own real estate (just shares in a corporation), no title insurance is needed.

How to Get Title Insurance

Your escrow or closing agent will launch the process of getting you title insurance soon after your purchase agreement is signed. Usually your closing agent or attorney will choose your title insurer for you, from one of the five major U.S. title insurance underwriters.

You will probably need to shell out a one-time fee of around $1,000 for title insurance. (In some states or locales, however, the seller traditionally foots the bill.) The process is all very standard and likely to go through without a hitch.

Bottom Line

Costs aside, whether you need owner’s title insurance really depends on how comfortable you feel buying a home based on the title information you have. Even if the closing attorneys have done their homework, they might have overlooked something important. At no fault of your own, that might eventually come back to haunt you. Having title insurance can potentially help you to avoid a financial nightmare later on