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How Does Title Insurance Work?

Your home is usually the most expensive purchase you will ever make. Title insurance is a way of protecting homebuyers and mortgage lenders from financial losses that may be attached to a bad title for the home you’re buying. Most mortgage lenders require a title search to ensure the property has a clear or clean title before you close on your new home. But sometimes things get missed.

Title insurance, with varieties sometimes called a loan policy, lender’s policy, or owner’s policy, can help protect you and the lender from any potential disputes, debts, claims, or issues that might arise after your sale is complete. For instance:

• Conflicting wills
• Liens or judgments
• Previous fraud or paperwork forgery
• Heirs who come forth to claim the property
• Unpaid property taxes or fees

Title insurance protects against “any issue that can prevent the seller from legally handing over the title of ownership to the homebuyer. Or unresolved issues pertaining to the title that the previous owner has swept under the rug,” Gates Little, CEO of AltLine at the Southern Bank Company, told The Balance in an email interview.

Title insurance is required whenever you buy a property that is secured by a mortgage or when you refinance your mortgage. However, title insurance can be optional if you buy your home for cash or through another unconventional sales transaction.

Here’s a quick look at how title insurance works:

• The buyer selects a licensed title company to complete a title search. Your real estate agent, lender, or builder may recommend one, or you can choose your own.
• The title company checks the property history, including public records, deeds, court records, and names associated with the property.
• If any issues are found, the title company will attempt to resolve the problem before the buyer closes on the sale.
• Once any known issues are cleared, the property’s ownership is now eligible to be transferred to the buyer.
• Before closing on the sale, the lender will require you to purchase title insurance to protect it from future issues.

Example of Title Insurance

Unpaid property tax is a common example of why you may need title insurance. “If a seller has years of unpaid property taxes, those fees (and their interest) could be passed along to the new homeowner unless they have title insurance,” Little said.

Here’s another example: “When you purchase a home, only to find out that certain renovations or additions were done without a permit and must be demolished. “This has obvious financial implications that can be insurmountable without title insurance,” Little said.

Types of Title Insurance

Title insurance policies come in two types: lender’s policies and owner’s policies.

Lender’s Policy

This type of policy only benefits the lender. It protects it from potential claims against the property that could come up later. Your lender will require you to obtain a lender’s policy to protect the investment they have made into the property.

Owner’s Policy

Owner’s title insurance benefits you. It is a separate policy that protects your ownership rights if someone tries to sue you or file a claim against the property. This type of insurance is optional.

Title Insurance vs. Homeowners Insurance

Title insurance is different from homeowners insurance. Here are the main differences:

Title Insurance	Homeowners Insurance
Protects your ownership of the home or property	Protects you from financial losses if your property is stolen or damaged due to weather, for example
You only pay the premium once at closing	Premiums are paid every year

Do I Need Title Insurance?

Absolutely. “Title insurance is important because you can never know a home’s (or homeowner’s) full history. Even a professional title search can have holes. So obtaining title insurance can protect you from the consequences of a stranger’s poor decisions,” Little said.

One way to look at it is as assurance instead of insurance, because it gives you peace of mind. So if any issues come up down the line, or if anyone ever challenges your ownership of the property, your title company will handle the dispute for you. “Without owner’s title insurance, a homebuyer would have to hire an attorney out of pocket,” Chris Birk, a vice president at Veterans United Home Loans, told The Balance by email.

Frequently Asked Questions (FAQs)

What are the advantages of owner’s title insurance?

“The history of a property is not always a simple line of ownership,” Maria Hanson with ExpertInsuranceReviews.com said. “Every unique feature of a property’s history can present a unique set of legal risks. The title insurance company makes it their job to go through that history with a fine-tooth comb to mitigate their risk. The title insurance company accepts responsibility for you or to the lender that the property is able to be purchased.”

Is title insurance a one-time fee?

Title insurance is a one-time fee that is typically rolled into your closing costs. The cost of a lender’s title insurance policy varies, depending on your state, the home’s value, and whether you are buying versus refinancing. Prices can range from $500 up to $2,000. However, you may save money when you buy owner’s and lender’s title insurance from the same company instead of buying them separately.

How long is title insurance good for?

When you buy a lender’s title insurance policy, it is good until you pay off the home loan because it is designed to protect the lender. However, when you buy an owner’s title insurance policy, you only pay for it once, but your coverage will last for as long as you own the home.

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