Title Insurance

Title Insurance

Key takeaways

• Title insurance protects owners and lenders from financial loss due to defects in a property’s title (e.g., liens, back taxes, forged documents).
• Unlike standard insurance, it protects against past events discovered after purchase.
• Lenders almost always require lender’s title insurance; owner’s title insurance is optional but recommended.
• Coverage is purchased for a one-time fee at closing and typically ranges from about $500 to $3,500 depending on state, provider, and purchase price.

What is title insurance?

Title insurance is indemnity coverage that protects against financial loss arising from defects in the legal title to real property. It covers claims that a prior event or condition (prior to the policy date) gives someone else a legal right to the property or creates a financial obligation on it.

How it works

Before issuing a policy, a title company performs a title search—an examination of public records—to determine legal ownership and identify existing claims or encumbrances. Title insurance then:
* Pays for legal defense if a covered claim is brought against the title.
* Reimburses the insured for covered losses up to the policy limit.
Because title searches can miss errors or hidden defects, the one-time premium also covers the insurer’s promise to defend or indemnify against covered past defects discovered later.

Common problems title insurance addresses
* Unpaid property taxes or municipal liens
* Outstanding mortgages, home equity lines, or other recorded liens
* Conflicting wills or undisclosed heirs claiming ownership
* Forged or incorrect signatures, fraud, or falsified documents
* Erroneous public records, restrictive covenants, and unrecorded easements
* Judgments or unresolved lawsuits tied to the property

Types of title insurance

• Lender’s (mortgagee) title insurance: Usually required by lenders and protects the lender’s interest up to the loan amount. It does not protect the borrower’s equity.
• Owner’s title insurance: Optional policy that protects the property owner’s equity and remains in effect as long as the owner or their heirs have an interest in the property.
• Extended or enhanced policies: Offer broader protection than standard owner policies (coverage scope varies by insurer).

Buying title insurance

• The escrow or closing agent generally orders the title search and the insurance when the purchase agreement is complete.
• Title insurance is paid with a one-time premium at closing. Costs vary by state, insurer, and home price (typical owner policy range: $500–$3,500).
• Federal rules (RESPA) prohibit sellers from forcing buyers to use a specific title insurer; comparison shopping is recommended.
• Many transactions include both a lender’s policy (required) and an owner’s policy (recommended).

Risks of not having title insurance

Without title insurance, buyers assume the full financial burden of title defects discovered after closing. Example consequences:
* Paying prior unpaid property taxes or liens that were attached before purchase.
* Losing the property if a stronger legal claim is later established by an heir or lienholder.
* Facing costly legal defense expenses to clear title issues.

For lenders, lack of a lender’s policy exposes the mortgage holder to losses if a defect reduces the value or marketability of their collateral.

When to consider an owner’s policy

Owner’s title insurance is particularly advisable when:
* You plan to own the home long term and therefore will accumulate equity.
* The property has a complex history (foreclosures, many prior owners, unclear chain of title).
* You want protection against hidden past defects that a title search might not reveal.

Bottom line

Title insurance differs from other insurance by covering losses from past events affecting ownership. A lender’s policy is typically required by mortgage lenders; an owner’s policy is optional but provides lasting protection for your investment and peace of mind. At closing, compare insurers and understand the coverage scope before purchasing.