Everything You Need to Know About Title Insurance

As a new homebuyer, you may have heard your real estate agent mention title insurance and wondered, “What’s that?”. And if you are not working with an agent, your first opportunity to ask the question, what is title insurance, might be when you see it as a line item to pay during closing.

The bottom line is that when you purchase a home, you will most likely pay for title insurance as part of your closing costs. This guide will walk you through everything you need to know about this critical homebuyer protection. You’ll find answers to questions like how does title insurance work, why it is necessary, and how much it costs.

What is Title Insurance?

The home you’re buying may be new to you, but every property has a history (even if you’re the first occupant). A thorough title search can help uncover any title defects tied to your property. And, subject to the terms of the policy, your title insurance provides protection for you from title problems that may become known after you close your transaction.

Here are just a few examples of the hidden title problems that can arise:

• Errors or omissions in deeds
• Undisclosed mortgages, liens, or lawsuits
• Undisclosed easement and boundary issues
• Forgery
• Fraud
• Undisclosed heirs

Two Policy Types: Owner and Loan

There are two types of title insurance policies: a loan policy and an owner’s policy. If you take out a mortgage loan when you buy your property, your lender will require a loan policy of title insurance. This policy is typically based on the amount of your loan, and the policy amount decreases as you pay off the loan. It protects the lender’s interest in the property should there be a problem with the title.

An owner’s policy protects the buyer if there is a title issue. This policy is issued for the final sale price of the real estate purchase. Even though you will pay for this policy only once (at closing), your coverage will last for as long as you own your home.

For many of us, a real estate purchase may be the largest financial investment we will ever make. Like many types of insurance, you may never need to use your owner’s policy (and you likely hope you don’t), but the value of what you stand to lose is quite high. So, when you buy a title insurance owner's policy, think of it as buying peace of mind, knowing that your home will remain yours.

Consider an Endorsement Option

When you are discussing title insurance with your agent or title company, be sure to ask about optional endorsements. Endorsement options are an additional cost. Bear in mind that you may also be required by your lender to purchase some types of endorsements, although often, the title or escrow company will order them for you.

Wondering what optional endorsements are or why you may need them? Here are some types of risks that endorsement coverage can protect against and some examples of how they can protect you:

• Environmental protection liens: can protect new homeowners from legal claims of environmental damage done by the home’s previous owner(s).
• Enforcement of covenants, conditions, and restrictions (CC&Rs): can cover loss when prior owner(s) disregard a CC&R, such as a land use violation (CC&Rs vary by state).   
• Water or mineral development damages: can protect buyers of homes in new developments against damages if a developer violates another person’s mineral or water rights.
• Property boundary accuracy: can protect new homeowners against loss if property lines do not match the actual recorded or surveyed lines.

 While less likely, if you have a living trust, you can purchase an endorsement option that lets you add insureds who are named in your trust.

How Does Title Insurance Work?

When you buy a home, you are given “title” – the owner’s right to possess and use the property. Title insurance protects you, the buyer, as well as the lender, against the possibility that the sellers (or even previous sellers) do not have free and clear ownership of the property. Without this clarity, the sellers do not have the right to transfer the home to you. Title problems can surface after you close on your home and can affect your homeownership rights.

What Does a Title Company Do?

When you purchase title insurance for your property, the title company conducts an in-depth review of public records to make sure there are no problems with the title. Title searches can uncover title issues like liens, judgments, incorrect information on prior loans, assessment taxes, and other issues. The title company will work to fix any defects that are found before your transaction closes. During the last step, the title company will issue an insurance policy to help protect you from issues that might be uncovered later.

Unlike homeowners insurance, which is limited to future incidents, title insurance is limited to problems that already exist when the policy is issued. If you have problems related to the title of your home, your title insurance policy includes coverage for legal expenses that may be necessary to investigate, litigate, or settle a claim.

It’s important to understand some of the common title issues that can arise to help raise your awareness of how this insurance works. Let’s look at ten scenarios and how they can affect the sale of a home:

1. Errors in Public Records

Errors happen, but when they affect your homeownership rights, they can be devastating. Clerical or filing errors could affect the deed or survey of your property and cause financial strain when resolving them.

2. Unknown Liens

Often, the previous owners of your new property are not meticulous bookkeepers – or billpayers. And even though the former debt is not yours to pay, banks or other financing companies can place liens on your property for unpaid debts, even after you have closed on the sale. This is an especially worrisome issue with distressed properties. Some examples are when the home is:

• about to be or is in foreclosure
• on the brink of repossession by a lender, or already bank-owned
• in a state of decline due to lack of maintenance

3. Illegal Deeds

While the chain of title on your property may appear perfectly sound, it's possible that a prior deed was made by an undocumented immigrant, a minor, a person of unsound mind, or one who is reported as single but is married. These instances may affect the enforceability of prior deeds, affecting prior (and possibly present) ownership.

4. Missing Heirs

When a person dies, the ownership of the home may fall to heirs or those named in the person’s will. However, those heirs are sometimes missing or unknown at the time of death. Other times, family members may contest the will for their own property rights. These scenarios – which can happen long after you have purchased the property – could affect your rights to the property.

5. Forged Documents

Occasionally, forged or fabricated documents that affect property ownership are filed within public records, obscuring the rightful ownership of the property. Once these forgeries come to light, your rights to your home could be in jeopardy, making title insurance an important protection for you.

6. Undiscovered Encumbrances

When it comes to owning a home, three is a crowd. At the time of purchase, you may not know that a third party holds a claim to all or part of your property – whether due to a former mortgage or a lien or non-financial claim like restrictions or covenants that limit the use of your property.

7. Unknown Easements

You may own your new home and its surrounding land, but an unknown easement may prohibit you from using it as you'd like or could allow government agencies, businesses, or other parties to access all or portions of your property. While usually non-financial issues, easements can still affect your right to fully enjoy your property.

8. Boundary and Survey Disputes

You may have seen several surveys of your property before your purchase; however, other surveys may exist that show different boundaries. For example, a neighbor or other party may be able to claim ownership of a portion of your property.

9. Undiscovered Will

When a property owner dies with no apparent will or heir, the state may sell his or her assets, including the home. When you purchase such a home, you assume your rights as the owner. However, even years later, the will of the deceased owner may come to light and your rights to the property could be seriously jeopardized.

10. False Impersonation of Previous Owner

Common and similar names can make it possible to "impersonate" a property owner. If you purchase a home that was once sold by a false owner, you can risk losing your legal claim to the property.

Protecting Your Biggest Investment

These and other issues are often covered by an owner's policy of title insurance. When you buy a home, make sure you're protecting that investment with title insurance. Another way to protect your investment is with a home warranty, which can cover your home’s many crucial appliances along with systems, such as your heating, plumbing, and electrical. First American offers these home protection plans to fit any budget, and when a covered item breaks down, they’ll send a prescreened technician to diagnose and determine whether it needs repair or replacement. If you’re purchasing a new home, it’s easy to review what you can protect in your home with a free quote.

FAQs About Title Insurance

What is the typical cost of title insurance?

The cost of title insurance varies by state, property value, and policy type. The typical cost range is between 0.1% to 2% of your home's purchase price. For example, if a home’s purchase price is $400,000, the title insurance fee may be between $400–$8,000.

What is the primary purpose of title insurance?

Title insurance is issued to a homebuyer in the amount of the home’s purchase price to ensure that the title company will cover any title defects that occur after the closing.

What are the advantages of owner's title insurance?

Title insurance can protect your investment in your new home if the sale fails due to a title defect. It also provides protection for you after the purchase, if a title defect is discovered later. Another advantage is title insurance covers you for the entire time you own the property and is a one-time-only purchase when you buy your home.

What is the disadvantage of title insurance?

While cost may be an issue for some, the cost of title insurance is typically included in your closing costs and is a one-time cost to you. Title insurance is also not foolproof and may not cover every issue that arises after a property has been purchased.

Who should have title insurance?

If you’re purchasing a home, you should get title insurance, and if you’re taking out a mortgage, your lender will require a policy. Title insurance assures financial protection for you and the lender.

The contents of this article are provided for general guidance only. First American Home Warranty does not assume any responsibility for losses or damages as a result of using this information.