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Buying a Home: Do You Need Title Insurance?

If you recently bought a home, you may be considering title insurance. This protects you from taking a financial downfall triggered by property ownership issues. Believe it or not, someone may have a legal right to the home you’re in, even if it doesn’t come up in a search. Title insurance can help protect you from anything that may occur after closing that could damage your financial interest in the property. Of course, you can always find a financial advisor to help you make the right decisions for you around homeownership.

What Is Title Insurance?

When a property is bought or sold, a record of that transaction is usually filed in public archives. Events that may affect the ownership of this property like liens or zoning restrictions also get archived. This is part of a property’s title.

So when you purchase title insurance, a title company runs a deep search through these and other records to detect any issues with the ownership of the property. It may also look at deed, tax and court records to verify ownership history. Typically, you pay a one-time premium for this service at closing. Your policy is good for as long as you or your heirs own the home. If you have an issue with the home before or after closing, your policy covers you against any losses.

Types of Title Insurance

There are two types of title insurance, lender’s title insurance, and owner’s title insurance. When buying a house, a buyer will typically be required to purchase lender’s title insurance by the bank or financial organization you’re getting a loan from. This is because lender’s title insurance protects the lender in the event the seller of the home did not have the legal right to sell the home. A lender’s policy usually stays in effect until you pay off your loan, sell the home or refinance.

Additionally, the seller of a home will end up purchasing owner’s title insurance for the amount you paid for the home. It covers a broad range of problems that may arise, including tax liens, deed errors or omissions, forgery of deed documents, fraud and mistakes in the public record.

Some owners’ policies will also offer extended coverage. These protect against things like building permit violations, zoning law violations, certain types of structural damage, and inaccurate surveys. If someone sues you or your lender due to a title problem, both policies cover any legal costs or losses. These costs or losses include your down payment, principal payments, or the cost of any improvements you’ve made.

Risks of Not Having Title InsuranceBuying a Home: Do You Need Title Insurance?

With today’s technology and access to information, many people may not think it’s a big deal to have title insurance. However, it’s a huge risk to not have title insurance as it’s opening both parties during the sale of a home up to a large amount of unnecessary risk for mistakes that are out of their control. Consider these potential damaging scenarios:

  • A real estate investor buys a home to flip it and discovers after closing that the title isn’t valid from the previous owner. This didn’t come up during a title search so the investor is now out of pocket for anything that was paid at closing, and if you would have taken out a loan then you’d be on the hook to pay it back.
  • A newlywed couple buys the home they saved for, after cutting a bunch of expenses from their dream wedding. Unfortunately, after closing they discovered that there were unpaid property taxes on their home. As the new owners, the duty to pay those taxes has passed to them. They either must pay the taxes that they didn’t accumulate or risk losing their home.
  • A single mother buys a home and completes a title search that doesn’t find anything. Unfortunately, there was a lien that hadn’t been filed yet on the property. Once it is filed the single mother, as the new owner, now must pay the lien or risk losing the home.

Is Title Insurance Really Worth It?

As you can see from the examples above, it’s very risky to go without title insurance when you’re buying a home. It’s important to make sure that you’re protected and you don’t get stuck paying someone else’s debt in order to salvage the property that you spent your own hard-earned money on.

What you pay for title insurance will vary based on where you live and the policy itself. For example, a lender’s policy may cost around $2.50 for every $1,000 of coverage.

The average owner’s title insurance policy costs about $1,000. But depending on how much your home costs, title insurance could run anywhere from a few hundred to several thousand dollars. Title insurance may be a small price to pay for peace of mind, and in most cases will be required by the lender anyway.

How to Buy Title Insurance

Title insurance is paid for with a one-time fee, typically at closing on the property. The process is typically initiated by the escrow or closing agent, or attorney, who is managing all of the closing procedures. However, you’ll still be able to choose your insurance provider either by selecting amongst options from your closing agent, or by going out and shopping for your own title insurance. It’s a pretty straightforward process that just gets lumped into the many things signed and paid for at closing.

Bottom Line

Buying a Home: Do You Need Title Insurance?

Costs aside, whether you need owner’s title insurance really depends on how comfortable you feel buying a home based on the title information you have. Even if the closing attorneys have done their homework, they might have overlooked something important. At no fault of your own, that might eventually come back to haunt you. Having title insurance can potentially help you to avoid a financial nightmare later on.

Tips on Protecting Your Home

  • Buying a home is a big investment, so you may benefit from speaking to a financial advisor beforehand. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Taking out title insurance is one of several closing costs you may encounter, and they may rise to several thousand dollars. To get a better grip of what you can afford, use our closing costs calculator.

Photo credit: ©iStock.com/Izabela Habur, ©iStock.com/skynesher, ©iStock.com/Geber86

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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