Buying or refinancing a home is one of the most significant transactions you’ll ever make. That’s why it’s essential to make sure the process goes smoothly every step of the way.
One of the most important steps is obtaining title insurance — so there are no surprises that could put your transaction at risk.
You and your lender will want to ensure that the property title is clear and free from issues that could derail the time, energy, and money you’ve put into the transaction. You’ll work with a title company to handle this. Title companies also manage property closings and hold funds in escrow until the purchase is complete.
As part of the title insurance process, a title company will search for:
- Errors in public records
- Unknown liens for taxes and unpaid contractors
- Missing heirs and undiscovered wills
- Forgeries and false impersonation
- Undiscovered encumbrances and easements
- Boundary disputes
- Other red flags
A title company searches for defects by reviewing public records such as deeds, mortgages, wills, divorce decrees, court judgments, and any other records that could challenge a clear title.
When refinancing an existing mortgage, the title company checks for liens or encumbrances that may have occurred since the original purchase — such as a home equity loan, unpaid tax lien, or divorce settlement.
The title search determines who owns the property, what outstanding debts exist against it, and the overall condition of the title. As a buyer, you’ll receive a title report detailing the findings. A title insurance policy will also protect the lender and the new owner from potential losses if someone else claims ownership after the sale.
Two Types of Title Insurance
There are two types of title insurance.
A lender’s policy protects the lender in a title dispute and lasts for the duration of the mortgage. Lenders will require their own title insurance as a condition of your loan. However, a lender’s policy does not protect the home buyer.
A homeowner’s policy protects you during title disputes. It is issued for the home’s full purchase price and covers legal fees for defending your claim to the title. This policy lasts as long as you or your heirs own the property.
A homeowner’s title insurance policy covers issues that may arise after the purchase, including:
- Zoning and building permit violations
- Fraudulent liens filed against the property
- Neighbors building on your property or encroaching on it
- Other situations not discoverable in a standard title search
Buying Title Insurance
It is typically less expensive to purchase the lender’s and owner’s policies simultaneously from the same title insurer. The home buyer should insure the property’s full purchase price, while the lender only requires enough coverage to match the loan amount.
In most cases, the real estate agent selects the title company for a home purchase, or the lender does when refinancing. However, under the federal Real Estate Settlement Procedures Act (RESPA), borrowers have the right to choose their own title company. It is unlawful for a lender to require you to use a specific insurer.
Some title insurance rates are set by individual states, so there may be no price variation from company to company. Other states do not regulate title insurance fees at all.
Depending on where you live, the premium may be paid by the buyer, the seller, or split between both parties — and it can often be negotiated as part of the sale. Premiums are paid only once, with no ongoing payments, unlike most other forms of insurance.
Premium costs are based on the dollar amount of coverage. To ensure transparency, all title insurance companies must file a schedule of rates and forms with their state’s insurance commissioner. Costs can vary widely from state to state due to differences in coverage and closing processes — in many states, the title company handles closing, while in others, an attorney or escrow company takes that role.
Coverage is effective as of the policy’s issue date and covers issues arising prior to your ownership. Title insurance companies may also offer discounts for bundling title insurance and escrow services, for first-time buyers when a property has resold within the last five years, or for homes purchased in a new development at a subdivision bulk rate.
The Difference Between Title Insurance and Homeowner’s Insurance
Title insurance protects against losses due to title defects. Homeowner’s insurance, by contrast, covers your house and its contents — typically including losses from fire, theft, vandalism, and personal liability claims. Homeowner’s insurance premiums are billed monthly, quarterly, or annually.
It’s also worth noting that a lender’s title insurance policy only protects against undiscovered claims made before the sale — it does not cover claims that arise after you purchase the property. For example, you wouldn’t be covered if a subcontractor files a lien against your newly built home after the closing date.
To guard against post-purchase issues like these, you can purchase an owner’s title insurance policy, as described above.
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