What is title insurance?

title insurance
Title insurance provides added security on a property that a consumer believes they own. It is a form of indemnity coverage which protects an owner against a potential loss on a real estate property.

Title insurance is for the land and property, not the home itself. It is not to be confused with homeowners insurance which protects the home in instances of fires, floods and similar situations.

Unlike other forms of insurance, title insurance provides backwards protection. It protects buyers and lenders against any liens or defects to the property that occurred in the past before the purchase was made. When a home is purchased, the insurer will conduct a title search by viewing public records and other documents to see if there has been any issues with the property.

Later on, if someone arises from the past that the insurance company missed, the buyer will be covered.

For example, if the title insurer fails to discover that there is a lien on the property, the property owner will be covered, according to Money Crashers editor, David Bakke.

Title insurance is available in two types: lender’s title insurance and owner’s title insurance.

Lender’s title insurance is required by nearly all mortgage loan lenders. The only time it is not required is in the case of a cash-only home purchase, where a mortgage loan is absent. Since a lender is not present in such a situation, no further protection is needed.

Daniel Price, president and CEO of OneTitle National Guaranty Company, said lender’s title insurance only protects the lender during the purchase, not the buyer.

“Because the lender has a lien on the home, they have an interest in making sure the collateral is good,” he said.

The second type is owner’s title insurance. Although this form is not required for owners, it is usually an inexpensive way to protect oneself, says Jeff Vinzani, a commercial real estate attorney and a title insurance agent.

He said that nearly all banks and lenders require title insurance coverage to protect themselves, but property owners can increase their protection by adding on owner’s title insurance for a small additional fee.

“For a few dollars more, you can get owner’s coverage as well,” Vinzani said. “This is important so that the owner has their own coverage to protect their equity in the property.”

Title insurance, in both its forms, adds a level of comfort and security for either the lender or owner.

Title insurance is a fundamental part of the closing costs on a new home. Despite its commonality, many buyers do not realize it is present, according to Kevin Tacher, founder and CEO of Independence Title.

The insurance, a one-time fee which lasts for the duration of the loan, can cost buyers between several hundred dollars to several thousand depending on the value of the mortgage. Tacher said each state has a different rate calculation. For the state of Florida, title insurance costs $5.75 for every $1,000, equating to a $575 cost for insurance on a $100,000 mortgage loan. Other states range both higher and lower.

Other than the added cost, there are few added complications, Vinzani said.

The first occurs when a buyer refinances a mortgage loan. The new lender will require a new loan policy and therefore new title insurance to protect their collateral.

Another factor to pay attention to is the credibility of the lender and insurer. Tacher said it is important to get title insurance with a trustworthy lender because there are various items not covered by title insurance.

“[You] need to deal with someone they can trust,” he said. “[Some lender’s] don’t put the time in to protect the buyer. They are more concerned about moving the property.”

The final factor that should be considered is that title insurance claims rarely develop. Vinzani said in over 25 years of experience, he has only dealt with a few owner’s title insurance claims. Most buyers will not see this coverage used, but it is still a recommended addition when buying a new home.  

“Like any other insurance, you don’t really realize you need title insurance until a problem arises,” Vinzani said.