What is title insurance and why do you need it?

Buying a home, or any piece of real estate, is a big financial decision. To protect your investment, you’ll want to consider purchasing title insurance. Title insurance protects borrowers and lenders from unforeseen issues with a property title, such as title fraud or an undisclosed lien. Should an issue arise, title insurance can safeguard you from financial loss.

What is title insurance?

When you buy a home, your title company is responsible for completing a title search. During this process, it will verify that the title is clear from any liens, claims of ownership, or errors. Although this process is usually thorough, unforeseen issues occasionally come up, creating a risk to both you and your lender. Title insurance, paid as a one-time fee at closing, protects both of you.

While they both operate similarly, title insurance comes in two main forms, as Eric Bramlett, a REALTOR® and owner of Bramlett Residential, explains: “It is crucial to understand that there are two types of title insurance policies: one for the lender and one for you as the homeowner. The lender's policy is necessary if you're taking out a mortgage, as it protects the lender's interest. On the other hand, the homeowner's policy safeguards your financial interest.”

The premium is based in part on the property's value, but varies by location and insurance provider. In most states, you’ll be required to cover your lender’s title insurance.

Types of title insurance 

Here is what you need to know about the two main types of title insurance:

• Lender’s title insurance (typically mandatory*): Your lender will probably require you to pay for lender’s title insurance. The policy goes into effect on closing day, when ownership of the property is legally transferred. This protects the lender if any issues arise, such as someone filing a legal claim on the home. Lender’s title insurance may cover up to the loan’s value because it’s designed to protect your lender’s financial interest. The lender will be compensated for any costs or losses it faces as a result of unexpected claims on the title after closing. 
• Owner’s title insurance (not mandatory): Similarly, owner’s title insurance protects the homebuyer in the event of any claims on their property. While the owner’s policy isn’t required, it’s a good way to financially protect yourself. Settling a title claim could cost thousands of dollars, and owner’s title insurance can protect you from legal claims against the property. These could range from unpaid contractors who have a lien against the house to misplaced or fraudulent title documents.

Note: *As of March 2024, the Federal Housing Finance Agency has approved a pilot program to make homeownership more affordable. Part of that plan includes waiving the lender’s title insurance requirement in some cases. 

What does title insurance cover?

Title insurance can protect you from financial loss due to title defects. That said, it doesn’t cover everything. Here is a closer look at the fine print:

How much does title insurance cost?

You can expect to pay approximately 0.5% of the home price for title insurance premiums, though the exact amount will vary depending on your state’s requirements and the lender you are working with. In layman’s terms, if you buy a home that costs $600,000, you could be spending an additional $3,000 on this coverage. You can also use a title insurance calculator to get a better sense of what you may pay.

There are steps you can take to keep your title insurance costs as low as possible:

• Shop around: You can comparison shop for the best title insurance rates, and if you are shopping for lender’s and owner’s title insurance, you can use the same title insurance company for both.
• Negotiate with the seller: Negotiating who pays for title insurance coverage with the seller could save you some, if not all, of the cost.
• Stick to a lower coverage amount: Consider opting for a lower coverage amount if it fits your risk tolerance and budget.
• Check your state’s requirements: Not all states require the same level of coverage, so ask your title officer or real estate agent for more details.

Is title insurance worthwhile? 

Although it is easy to think that a title problem will never arise, it could cost you a lot if something does come up. Claims against the title, also known as encumbrances, could cost you tens of thousands of dollars in legal fees to resolve. Here are a couple of examples of how title insurance could lessen your risk:

• Undisclosed liens: If you buy a property with an undisclosed lien, such as a tax or utility lien, you could find yourself responsible for that debt. If you have title insurance, your insurer will take on this financial burden.
• Ownership disputes: Say you bought a home and the previous owner’s long-lost daughter shows up claiming she has a right to the property. Title insurance, while it may not entirely stop you from losing the house, will cover the legal costs should that happen.
• Fraudulent listings: Although not common, if a renter or someone who doesn’t own the home manages to list it and move it through the sale process, you could be financially responsible. Title insurance covers that cost.
• Outstanding property taxes: Moving into your dream home only to get a giant tax bill listing out unpaid property taxes can be financially devastating. Title insurance takes care of that debt.

Title insurance FAQ

When and how do you buy title insurance?

Typically, title insurance is bought during the closing process. Since the majority of mortgage lenders require you to purchase a lender’s title insurance policy to protect their loan, you can count on your lender, insurance agents and title company to walk you through the process. During this time, you can also purchase an owner’s title insurance policy to protect yourself.

Do I need to buy title insurance if I’m paying in cash?

When paying in cash, you don’t need to buy title insurance to protect a lender, but an owner’s title insurance policy is still highly recommended. If you don’t buy title insurance, you won’t be protected should a title issue come up.

Can you get a warranty of title instead?

Sometimes, a seller will offer you a warranty of title, or a warranty deed. However, it is important to note that it is not the same as title insurance. A warranty of title simply assures you that the title is clear, but it doesn’t provide the same legal and financial protections as title insurance.