Title Insurance: What You Need to Know

By Jeff Wellman

Title insurance is one of the many elements you’ll hear your mortgage lender talk about if you are shopping for a new home. But what is title insurance, and why do you need it?

When you close on your new home, you receive the title. The title is a record of ownership. It’s a legal document that proves the homeowner’s identity. It will also indicate on the title that you have a lien on the property if you have a mortgage on it.

There are two different kinds of title insurance: Lender’s title insurance and owner’s title insurance.

What is Lender’s Title Insurance?

Lender’s title insurance protects the mortgage company that holds the lien on the property. If the seller doesn’t have the legal right to transfer ownership of the home, the lender is protected from any losses they may incur as a result. If you take out a mortgage you are required to purchase a lender’s insurance policy. Laws about lender’s title insurance are regulated by the state. The cost of the insurance policy is based on the amount of the loan. It generally costs between .05 percent and 1 percent of the loan amount. It’s a one-time fee that is included in the closing costs.

What is Owner’s Title Insurance?

Owner’s title insurance protects the homeowner from any third-party claims that might be made on the property after the sale. Before the sale is closed, the mortgage company will conduct a title search to make sure no one else can make a claim on the property. The claim could be from another mortgage company, an heir, or a construction contractor that is owned money, for example. It could also include fees from assessments. The mortgage company wants what is called a clean title, a title without any discrepancies. However, something may be missed or overlooked in the title search. If someone makes a claim on the property after the sale, the owner’s mortgage insurance covers the cost of the claim. The cost of owner’s title insurance is determined by the purchase price of the home. It usually costs between .05 percent and 1 percent. It’s also a one-time fee included in the closing costs.

Owner’s title insurance is optional. However, because the cost is relatively low compared to the value of the home, it’s worth the money to know you’re covered if something goes wrong after you purchase your new home. Even with a well-researched title, issues can be uncovered later. Back taxes, liens, and even fines for violating codes and ordinances that the former owner should have taken care of can pop up. If you as the current owner can’t pay them, you may end up forfeiting the property to the company collecting the money.

It is important to remember that owner’s title insurance only covers issues that pre-date your purchase of the home. It won’t cover any new liens or fees that are charged to the property after you become the owner.

Title insurance makes the home buying process less stressful by protecting all parties involved in the purchase of a new home and giving them peace of mind.