Introduction
Title insurance is one of those closing costs that buyers see on their Closing Disclosure, pay without fully understanding, and rarely think about again, until the rare situation where they need it. At that point, it's either one of the best purchases they ever made or something they wish they'd taken more seriously.
Unlike most insurance, which protects against future events, title insurance protects against past events, problems with the property's ownership history that may not have been discovered until after you closed. This article explains what it covers, why it exists, the two types you'll encounter, and whether the optional coverage is worth buying.
What Title Insurance Covers
When you buy a home, you're buying its history along with its present state. That history includes every prior owner, every transaction, every lien or encumbrance ever placed on the property, and potentially every error ever made in its legal documentation going back decades or longer.
A title search conducted before closing examines public records to identify known issues: unpaid mortgages, tax liens, judgment liens, easements, deed restrictions, and ownership disputes. But not all problems are discoverable through a title search. Some issues are hidden or arise from mistakes in historical records.
Title insurance covers financial losses resulting from defects in the title that existed at the time of purchase but weren't discovered until after closing. These can include:
- Forged signatures in the chain of title
- Fraudulent deeds, where someone transferred the property without proper authority
- Undisclosed heirs who later claim ownership
- Errors in public records, clerical mistakes in the deed, incorrect legal descriptions, misfiled documents
- Unpaid liens that weren't discovered during the title search
- Boundary disputes revealed by a later survey
- Issues from divorce or probate proceedings that weren't properly resolved
- Prior owners' unpaid taxes or judgments that create liens on the property
If a covered title defect is discovered after closing, your title insurance company defends your ownership in court if necessary and compensates you for losses up to the policy amount if the defense fails.
The Two Types of Title Insurance
Lender's Policy (Required)
Your lender requires a title insurance policy that protects their interest in the property. The lender's policy insures the lender for the amount of the loan, declining as you pay down the mortgage. This is a standard closing cost, typically $500 to $1,500, that you pay as the buyer even though the lender is the beneficiary.
The lender's policy protects the lender, not you. If a title defect emerges and the lender's claim is satisfied, you as the owner have no protection from the lender's policy.
Owner's Policy (Highly Recommended)
An owner's title insurance policy protects you, the buyer. It covers your equity in the property and continues in force for as long as you or your heirs own the home. Unlike the lender's policy, it doesn't decline as you pay down the mortgage, it covers the full purchase price for the life of your ownership.
The owner's policy is typically optional from the lender's perspective, though it's strongly recommended by most real estate professionals. It's often purchased simultaneously with the lender's policy at a discounted simultaneous issue rate, making it significantly cheaper than purchasing it separately. The incremental cost for an owner's policy when purchased alongside the lender's policy is typically $200 to $600 depending on the purchase price and state.
How Title Insurance Differs from Other Insurance
Title insurance is unusual among insurance products in several ways that help explain how it works.
You pay a one-time premium at closing, there are no ongoing monthly premiums. The policy remains in effect for the entire time you own the property (for an owner's policy) without any renewal payments required.
Unlike homeowners insurance or auto insurance, which protect against future events, title insurance protects against past events. The underwriting process (the title search) happens before the policy is issued to identify known issues and either resolve them before closing or exclude them from coverage. The insurance then covers unknown issues that the search didn't surface.
Claims under title insurance are relatively rare compared to other insurance types, the title search eliminates most known issues. But when a claim does arise, the amounts involved can be significant: the full value of your equity in the home or more.
What Title Insurance Does Not Cover
Title insurance covers title defects from before your purchase. It does not cover:
- Problems that arise after closing (like a lien you incur after you own the property)
- Issues that were visible inspection, boundary line disputes apparent from a current survey are sometimes excluded unless you purchase expanded coverage
- Zoning issues or government regulations that affect how you can use the property
- Environmental hazards
- Physical damage to the property
Some title companies offer enhanced owner's policies (sometimes called ALTA Homeowner's Policy or equivalent) with broader coverage that includes things like zoning violations, encroachments, and building permit issues. These are worth asking about, particularly for older properties with complex histories.
Who Pays for Title Insurance?
Custom varies by state and even by local market. In some markets, the seller traditionally pays for the owner's title insurance policy. In others, the buyer pays. In many markets, it's negotiated as part of the transaction.
Your purchase contract and local practice will determine who pays. When you're reviewing closing costs, confirm who's responsible for which policy and whether the seller's contribution is reflected in your Closing Disclosure if that was part of your deal.
Should You Buy the Owner's Policy?
For most buyers, the answer is yes. Here's the case for it:
The cost is modest relative to the protection provided. An additional $200 to $600 (at simultaneous issue pricing) for lifetime protection against title defects on a $400,000 home is an extremely favorable risk-reward ratio. Title defects may be rare, but when they occur they can be catastrophic, threatening your entire ownership claim.
The cases where title insurance has paid off include situations like: a previous owner who was in bankruptcy and whose transfer of the property was later challenged, a forged deed discovered years after closing, a missing heir who surfaces and claims an ownership interest, and clerical errors in old deeds that created ambiguity in the property description. None of these seem likely on any given property, but they happen often enough that the protection is worth its modest cost.
For properties with complex histories, older homes, homes that went through foreclosure, estate sales, properties with multiple prior owners in a short period, the case for owner's title insurance is even stronger.
The Title Search and Commitment
Before issuing title insurance, the title company conducts a title search and issues a title commitment (also called a preliminary title report in some states). This document shows the results of the search, identifies any known issues that need to be resolved before closing, and outlines what the policy will and won't cover.
Review the title commitment when you receive it. Your agent or attorney can help you understand any exceptions listed, items the policy won't cover because they're known conditions. Common acceptable exceptions include utility easements, CC\&R restrictions recorded against the neighborhood, and similar standard matters. Unusual exceptions deserve a closer look and an explanation.
Final Thoughts
Title insurance is one of the less exciting parts of closing costs, a one-time payment for protection against problems you hope you'll never experience. But for the relatively modest cost of an owner's policy, particularly at simultaneous issue pricing when you're already paying for the lender's policy, it's one of the better financial protections available to homebuyers.
Pay for it. Understand what it covers. Keep the policy documents somewhere accessible. And hope you never need to use it, but be glad you have it if you ever do.
Sources & Further Reading
For authoritative information on the topics covered in this article, consult these resources:
