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What is title insurance?

By Julie Tramonte

June 2021

I’ve owned 4 homes and I admit I didn’t really know what title insurance was until I had to research it for this blog post. Sure, I remember hearing it mentioned at each of my closings, but like a lot of mortgage terms, it went over my head. Plus, I was in a hurry to sign everything, move in and start decorating.

First, let’s start with what title insurance isn’t

Title insurance is not homeowner’s insurance, which protects your home and belongings against damage or theft. And it isn’t mortgage insurance, which makes it possible to put down less than 20% on a house by protecting the lender if a borrower defaults on the loan.

So what is title insurance?

According to Investopedia, title insurance is “a form of indemnity insurance that protects lenders and homebuyers from financial loss sustained from defects in the title to a property.” (I didn’t understand that at first either.) 

In plain speak, title insurance protects new homeowners from being on the hook financially for issues that happened before they bought the property. 

“What kind of issues?” you may ask. Title insurance protects you – after you buy the house – from bearing the financial burden if these types of issues are uncovered:  

  • Back taxes – if the property taxes were unpaid, the state can file a claim to collect the outstanding taxes from you, the new homeowner 
  • Liens – if the former owner owes money to creditors, a legal claim against the property allows them to collect what’s owed from the new homeowner 
  • Unknown heirs – there could be conflicting wills or an unknown heir, such as a child out of wedlock, could come forward with a claim of ownership
  • Survey errors – your new neighbor may dispute the boundary lines of your new home
  • Filing errors – mistakes, such as typos or incorrect filings of court documents
  • Forgery – unfortunately, falsified documents do happen

To avoid this, real estate transactions involve a search of public archives to confirm the property’s legal ownership. When the title search comes up clear, it means there are no issues filed against the property’s title that could dispute ownership and jeopardize the impending closing. 

If the search does uncover an issue, it can slow down the closing while things get sorted out, but at least you aren’t financially at risk. The current owner is responsible for resolving the issue. And if they don’t, you can walk away from the deal.  

The real problem comes if one of those “things” arise after you’ve bought the house. It doesn’t happen often, but if it does, you’ll really be glad to have the protection of title insurance.

But do I really need title insurance?

That answer depends on whether you want to risk the burden of paying for the previous owners’ problems, losing your property, or paying for a legal battle to fight for ownership. 

Even if you are willing to risk it – surprise! – your lender will most likely still require you to buy title insurance. That’s because there are 2 types of title insurance: owner’s title insurance and lender’s title insurance. Lenders require the borrower to purchase lender’s title insurance to protect them if there’s a future title dispute. While most homebuyers take the easy route (I certainly did) and let lenders choose and order title insurance on their behalf before closing, you can certainly choose to do your own title insurance shopping.  Owner’s title insurance is optional but can be an important part of protecting your financial investment. 

What does title insurance cost?

The price varies depending on the state and price of the house. Title insurance can range from $500 to $3,500. Typically, the buyer pays for the lender’s title insurance in one up-front sum as part of the closing costs and fees. Sometimes, you can negotiate with the seller to pay for owner’s title insurance; otherwise the buyer pays for it herself. Generally, title insurance appears on your closing disclosure. I looked at my closing papers to discover I paid $650 for my lender’s title insurance and – I’m embarrassed to say – I don’t have owner’s title insurance! (This is a case of “do what I say, not as I do!”)

Can I buy owner’s title insurance after closing?

Surprisingly, yes. But you can’t buy it after a defect has already been found in the title. Then, you’re out of luck. (I better get on it!)

Buying a new home can be a wonderful but nerve-racking experience. Reduce your stress level by purchasing title insurance. That way, you can spend your money decorating your new house instead paying for the former owner’s problems.

Susan Camp

This is excellent information for a homeowner or homebuyer. Thank you for preparing this.

Tevin Rainey

I really like this information it was very helpful.

Derrick George

I really learn alot from all this information as First time home buyer

Sandy

This information is very helpful.

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Julie Tramonte is a writer who joined MGIC in 2018. Prior to flying the coop, she wrote for a mattress company, a manufacturer and advertising agencies. She’s obsessed with reading, traveling, tennis and rearranging furniture. Mother of 2 beautiful, adult daughters. Empty nester who recently downsized. Her guilty pleasures are doughnuts and the Kardashians (don’t tell anyone).
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