If you’re financing a home purchase, you’ll need title insurance.
Unlike other insurance coverage, title insurance actually protects your lender, even if you, the buyer, pay for it. Note that there is also an optional homeowner’s title policy, which protects the homebuyer from title problems.
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Getting title insurance is part of the mortgage closing process with the closing agents, the title business, the lender and the real estate attorneys working together to handle the final paperwork.
Once you close on your home, the seller transfers your legal ownership of your home, or “title,” to the lender until the mortgage is fully paid off. Title insurance protects you and the lender if someone later files a lawsuit and tries to claim your property before you bought it.
“Lender’s title insurance is required in almost all cases by the lender for their protection, but owner’s title insurance is absolutely optional,” says Matt Medaries, vice president and general counsel for Navy Federal Title Services, The Title Insurance Division of the Navy Federal Credit Union.
However, you may still want to obtain an owner’s title insurance policy in addition to the required lender’s title insurance. this is why.
what is title insurance?
Unlike other typical insurance policies, title insurance does not protect your home against future incidents. protects your home from defects or past problems with a title after ownership has transferred to you. Common title issues to watch out for include public record errors, unknown liens, forgery, land boundary disputes, and unknown easements.
There are two types of title insurance policies you can purchase when you buy your home: lender’s title insurance and owner’s title insurance, with the latter being optional. here’s a breakdown of how they differ.
types of title insurance
lender’s title insurance
Lender’s title insurance is for the benefit of the mortgage lender. Although it protects the lender, the buyer is obligated to pay it. this type of policy ensures that the lender has the first lien on the home in the event of foreclosure or unpaid property taxes.
The lender wants to be first in line for revenue in these situations, says Gerry Glombicki, director of insurance at Fitch Ratings, one of the world’s largest credit rating agencies.
The only time you don’t have to pay the lender’s title insurance is if you pay cash for a house and don’t borrow any funds to make that purchase. While you’re not technically required to purchase homeowner’s title insurance, Glombicki and Medaries say it’s in your best interest to get it.
owner’s title insurance
Homeowner’s title insurance lasts as long as you own the property. Unlike lender’s title insurance, this type of policy only protects the property owner from property claims.
For example, if title forgery is suspected or if there are property issues due to conflicting wills and attorneys need to be involved, your homeowner’s insurance will cover the related legal fees. another example: if the previous owner left the property with multiple liens due to unpaid taxes or unpaid hoa dues, their homeowners insurance will cover it.
risks of not having title insurance
While lender’s title insurance is required, unless you’re paying cash for your home, owner’s title insurance is not. however, experts still recommend that homeowners purchase owner’s title insurance.
If you choose not to purchase owner’s title insurance, you will be financially responsible for correcting any future title problems, which can be costly. for example, you may need to retain an attorney to dispute any property claims; or if the previous owner did not pay their property taxes, you may have to pay the bill.
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“Without that optional title insurance, for example, you could be forced to pay a judgment to have a lien released or have to hire a lawyer to sue your seller. that’s just one risk out of many that, frankly, we don’t know when we’re sitting at the closing table,” says medaries.
how much does title insurance cost?
The cost of title insurance varies widely from state to state and depends on the price of your home as well as the value of the home.
“States regulate prices, so one state can be different from another,” says Glombicki, adding that you should expect it to cost about 0.5% to 1% of the home’s value. Title insurance is a one-time premium that is usually included in your closing costs and remains in effect as long as you own the home (unless you refinance).
The premium you pay for the lender’s policy is based on the amount you borrow, while the cost of the homeowner’s policy is linked to the value of the home.
“The more you borrow, the more expensive the lender’s policy will be. the less you borrow, the less expensive the policy will be. For a homeowners policy, the more expensive the house, the more expensive that policy will be and vice versa,” says Glombicki.
In certain states, if the seller already has an owner’s title policy that is less than 10 years old at the time of sale, they may be eligible for a discounted interest rate, also known as a reissue rate, says medaries. the discount rate ranges from 25% to 60% off, with 40% being the most common. Be sure to ask your lender about title insurance discounts before closing.
Remember that you can purchase separate title insurance policies, but it will generally cost less if you use the same insurance company for both the lender’s policy and the owner’s policy.
“title insurance is not that expensive to buy,” says glombicki. “Most people tend to buy it because it protects the home purchase, which is usually the most important banking transaction.”