What Is Title Insurance and Why Do You Need It?
Title insurance is a safeguard that protects property owners against financial losses or legal cost that could result from a claim or lawsuit filed because of something related to a prior owner. While most types of insurance protect you against problems that occur in the future, title insurance protects you against issues that occurred in the past.
How title insurance works
Whether you’re buying a new home or refinancing your current home, the title insurance process typically involves these steps:
- A title order is created. The lender, attorney or escrow officer creates a title order and reviews public records related to the home.
- A title search is completed. The title company will search large databases to research a number of factors related to the property’s ownership including:
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- How many times the ownership changed hands
- Whether there are any liens or unpaid tax judgments against the property
- Whether there are any contractors liens for construction or improvement projects in the past
- Whether the ownership was transferred legally and properly
- A title commitment or preliminary title report is issued. Once the research is completed, the title company produces a title commitment or preliminary title report for all the parties to the transaction to review. The report is usually divided up into three sections called Schedules, labeled Schedule A, Schedule B-1 and Schedule B-2. Here’s a brief explanation of what you’ll learn from each section:
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- Schedule A. This section describes all the facts about the purchase or refinance including the date the title was certified, who is being insured, the type and amount of insurance being issued, and how the owners are taking ownership (also known as title vesting in legal language).
- Schedule B-1. Pay close attention to this section: It details any conditions that need to be met before title insurance can be issued including tax liens, deeds of trusts from previous owners, judgments and corrections that need to be made. It also outlines special items that might need to be addressed like providing a power of attorney for someone signing on your behalf or recording of a death certificate if an owner of the home recently passed away.
- Schedule B-2. This section lists seven common items that won’t be insured by the title company. They may vary from policy to policy but usually include things like easements, mineral reservations and covenants, conditions and restrictions (CC & Rs), which are restrictions on how land can be used that are created by the original landowner.
- Your title insurance company represents you if title issues arise in the future. The title company that insures your home will handle legal costs or damages related to title problems like:
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- Forged ownership transfers
- Errors in recorded or filed documents
- Easements or liens that weren’t reported properly or at all
- Issues with the boundaries of your home and a neighbor’s home
Types of title insurance
The two most common types of title insurance are owner’s title and lender’s title policies.
How an owner’s title policy works
An owner’s title insurance policy usually covers the amount you paid for your home. It’s optional if you’re buying a home without a mortgage, but it’s a good idea to have it in case title claims pop up during or after your ownership of the home.
How a lender’s title policy works
Mortgage lenders require that you buy a lender’s title insurance policy to protect them for the dollar amount you borrow. It’s important to note the coverage is only for the loan, which means as you pay your mortgage off, the coverage shrinks. Once the loan is paid off, the insurance ends.
How much is title insurance?
Title insurance costs depends on the type of title insurance you need and whether you’re buying or refinancing your home. According to Jeremy Yohe, vice president of communications for American Land Title Association (ALTA), a national trade association for U.S. title insurance agents, you’ll spend:
- About 0.5% to 1% of the purchase price for a lender’s and owner’s policy together
- About 0.5% of the loan balance for just a lender’s policy for a refinance loan
Depending on where you live, title company fees and insurance premiums may be itemized or lumped together into one quote, and may include fees for:
- Endorsements
- Title search
- Closing protection letter
- Deed preparation
- Government recording
- Tax and other certificates
- Overnight mail and email/electronic document fees
- Wire fee
- Transfer tax
- Notary and settlement fee
- Document preparation fee
Why you should shop for your title insurance
When you receive an initial loan estimate from a mortgage lender, you’ll notice that title insurance costs are included in the “Services you can shop for” section of page 2. Follow these tips to get the lowest title insurance rates and fees:
- Haggle even if you can’t choose the title company when you’re buying. If the seller picks the title company, you can still send them an estimate from another company if the fees look higher than you were hoping to pay.
- Ask about discounts for refinance title fees. You’ll need a lender’s title insurance policy if you refinance your mortgage. Request a “reissue rate” if it’s the same company you financed your purchase with — they may even knock off some of the normal title fees to keep your business.
- Ask for a discount if you’re buying both types of policies. If you want the extra protection of a lender’s and owner’s policy, ask the title company if they can cut a deal for buying both policies.
FAQS about title insurance
Is title insurance necessary? Yes and no. It is necessary if you’re refinancing to cover the lender’s loan amount. It’s not required but is recommended if you’re buying a home without a mortgage to protect you from potential hidden problems with the home’s ownership history.
What does a title agent do? Also known as a title officer, the title agent does detailed research into public records databases to produce the title report that is then provided to all parties in the transaction. They also help with last-minute changes, such as a loan amount adjustment, adding a cosigner or putting the property in a trust.
What does a title company do for the seller? The title company may advise the seller on how to solve title problems before the home is sold or fix boundary issues with a survey to confirm the property’s boundaries before it’s put on the market.
What does title insurance not cover? Unlike homeowners insurance, you aren’t protected against things that happen in the future. That means if you don’t pay taxes, don’t pay a contractor for work done to your home or use your home in violation of local zoning and building laws, you won’t be protected against any legal issues that come up.