Title insurance at a glance
What it is: A title insurance policy protects its owner against disputes over who owns a piece of property. So if there’s a clerical error in the ownership records, or if a previous owner has unpaid property taxes, this policy pays the cost to defend your ownership claim in court or even reimburses you for the cost of your home.
Types: There are two types of title insurance policies: (1) the lender's title insurance, which protects the mortgage lender, and (2) the owner's title insurance, which protects the homeowner.
Who pays: Buyers typically pay for the lender's policy, which is almost always required if they get a mortgage. Owner's policies are optional but usually a good idea. In some locations, it's more common for the buyer to pay for this policy. In other areas, it's more common for the seller to pay.
What it costs: The cost of both title insurance policies — the lender’s and the owner’s — typically adds up to around 0.5% of the purchase price of the home. However, this cost could range from a flat rate of a few hundred dollars to more than 1%, depending on your home's value and location.
How does title insurance work?
To understand how title insurance works, you first need to know what a title, title company, and title search are.
What is a property title?
A property title consists of many legal documents that specify who is the rightful owner. It's more than just a piece of paper that verifies your ownership (that’s a document called the "deed"). A home's title includes a history of the chain of ownership and information about any liens (i.e., outstanding debts) on the property.
What do title companies do?
A title company verifies that the seller has clear title to their home — that is, that they have the legal right to sell the property without any challenges to their rightful ownership. Home buyers typically pay a title company for this verification.
What is a title search?
A title company performs a title search to confirm the seller's ownership. During the title search, the title company researches legal documents to identify anything that might prevent the seller from transferring ownership to the buyer.
Issues with the seller’s rightful ownership are commonly called "title defects" or "clouds on title." Title defects are fairly common, but the seller can usually correct them and continue the sale. Some of the most common title defects include:
- Unpaid property taxes
- Liens against the property
- Clerical errors related to the property title
What is a lien in real estate?
A lien is a claim of monetary interest in a property. Liens are typically filed and recorded with the county.
The most common example of a lien in real estate is a mortgage. However, there may also be liens for other home loans, property taxes, and contractor work (mechanic's liens).
Title insurance protects you from challenges to your legal ownership of your home when someone brings up a claim that wasn’t revealed during the title search. Most often, these claims relate to errors in the public records, undisclosed liens, and illegal deeds (meaning a previous owner wasn't eligible to own their home, like if they were a minor).
When someone files a claim against your title, your policy covers any legal expenses necessary to defend your right to ownership in court. Title insurance also reimburses you for any financial losses that result from a covered claim up to the full purchase price of the home.
A title insurance policy is basically the title company placing a "bet" that it caught all possible issues during the title search.
Do you need title insurance?
Most home buyers have to get a lender's title insurance policy as a condition of their mortgage. Lenders require this to protect their interest in the home in case there are any issues with its title.
Owner's title insurance is optional. However, we strongly recommend that you get an owner's title insurance policy. It's often well worth the cost for the following reasons:
- Title insurance is a one-time cost, and it covers you as long as you own the home. This is unlike homeowner's insurance, which you continuously pay.
- Not having title insurance could be disastrous. The likelihood of purchasing a home with a title defect is fairly low, but the cost of being uninsured if this happens is astronomical. You could potentially lose your home, along with any of the equity you built.
In many states, it's common for sellers to pay for the owner's title insurance policy. If you live in one of these states, you probably don't have to consider whether or not to purchase an owner's policy because it won't represent an additional cost.
Who pays for title insurance?
Home buyers typically pay for the lender’s title policy.
Who pays for the owner's title insurance largely depends on where you're located. In some areas, it’s more common for the buyer to pay for their own title insurance. In other areas, it’s conventional for the seller to pay for the buyer's owner's policy.
That said, who pays ultimately comes down to what the seller and buyer negotiate. Even if it’s common for the buyer to pay in your area, you could always try to get the seller to cover all — or a portion — of the cost.
This is who's expected to pay for owner's title insurance in each state:
| Who pays for owner's title insurance | States |
|---|---|
| Buyer | Alabama, Connecticut, Delaware, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New York, Oklahoma, Pennsylvania, Rhode Island, Vermont, Virginia, Washington DC, West Virginia |
| Seller | Alaska, Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Kansas, Michigan, Mississippi, Missouri, Montana, Nevada, New Mexico, North Carolina, Ohio, Oregon, South Carolina, South Dakota, Tennessee, Texas, Utah, Washington, Wisconsin, Wyoming |
| Split | Arkansas, Hawaii, Nebraska, North Dakota |
How are title insurance premiums calculated?
Title insurance costs are based on your home's value and its location.
Policies are typically priced based on a percentage of your home's value. However, this percentage usually isn't fixed. If your home is more expensive, you may pay a slightly lower rate. Here's an example of what this could look like:
| Home value | Title insurance premiums as % of home value |
|---|---|
| $200,000 | 0.55% |
| $400,000 | 0.45% |
Title insurance premiums also vary by location. In most cases, your state's insurance commissioner regulates the title insurance premiums in your area. And since each state has slightly different standards for how title insurance companies can set their rates, where you live has a big impact on your premiums.
» Calculate your title insurance costs by state.
How long does a title insurance policy last?
Title insurance policies generally don’t expire. They cover you until you sell the home or, for mortgage lenders, until the mortgage is fully repaid. Owner's title policies pass on to anyone who inherits your home as well.
What doesn't title insurance cover?
Title insurance doesn't protect your physical home.
Damage caused to your home by a fire, vandalism, or weather is covered by your homeowner's insurance policy (which home buyers are also required to purchase), not your title insurance policy.
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