What is title insurance and why do I need it?
Title insurance is a form of insurance that homeowners are required to purchase in nearly all refinance and purchase transactions. Unlike other forms of insurance, title insurance protects borrowers and lenders from issues that occurred in the past rather than issues that may arise in the future.
A “Title” is a document that states the legal owner of a property. Title insurance protects both mortgage lenders and owners against past defects or problems with the legal ownership of a property. This includes things like forged documents, lien claims on the property, undisclosed easements, ownership claims made by others, and mistakes from the previous title agency.
There are two types of title insurance:
A mandatory lender’s policy that covers the lender (mortgage company)
An owner’s policy that covers the homeowner (optional, but highly recommended)
Both types of policies are typically offered as a bundle together.
Is title insurance required?
A lender’s policy is required in every purchase and refinance transaction, and the borrower typically pays for it in a refinance transaction. Should there be a potential title issue, this policy protects only the mortgage lender in the amount of the loan.
On the other hand, an owner’s policy protects the buyer. Although it’s not required by law for borrowers to purchase an owner’s policy, it is highly recommended to make sure that you, as a homeowner, are protected from any potential legal issues that may come up.
How much does title insurance cost?
Title companies often provide two services during the mortgage process:
The Title Insurance premium is regulated on a state-by-state basis. The premium is a one-time cost paid at closing and can range from 0.5% of the purchase amount to over 1% depending on the state the property is located in. Because it is a percentage of the purchase amount, your title insurance premium can increase if your loan amount goes up.
Lender’s Title Insurance is the cost of the title insurance premium. All the other costs listed are fees related to settlement.
Settlement Service fees, on the other hand, include the fees that are incurred during closing, such as the cost of escrow and wire fees.
This can also include fees for activities involved in underwriting the title insurance policy, such as the title search fee and the cost to resolve issues. Like title premiums, these costs vary by state, but because these fees are charged by the title company itself, these can range from a couple hundred to over $1,000.
Real Life Scenarios
These are some examples of legal headaches that can arise which title insurance can protect you and your lender from:
You bought your house last year from a seller who inherited the property. However, you find out later that the seller has an undisclosed step-brother who also owns half of the property, according to the will. In this case, title insurance would help you offset the legal costs of challenging his claims to your property.
You bought a house, but it turns out that the seller had an overdue bill on a previous home addition. Now there’s a mechanic’s lien on the property from several years ago that predates your mortgage. Without title insurance, you’d be held liable as the current homeowner.
Part of your property turns out to be inaccessible due to a mistake by a past surveyor. Your property records are different than expected and the value of the home is affected as a result. Without title insurance, you wouldn’t be compensated for the financial loss.