Title insurance is a form of indemnity insurance that safeguards lenders and homebuyers against financial loss caused by title defects. The most prevalent type of title insurance is lender's title insurance, which is purchased by the borrower to safeguard the lender. The seller typically pays for owner's title insurance in order to protect the buyer's equity in the property.
Title Insurance and Types

• Title insurance protects lenders and buyers against financial loss resulting from title defects.

• The most common claims that are filed against a title are liens, back taxes, and conflicting wills.

• A one-time fee paid for title insurance covers expensive administrative fees for depth searches of title data to protect against claims for past occurrences.

Understanding About “Title Insurance”

Every real estate transaction requires a clear title. Before they can be issued, title companies must conduct a search on every title to determine if any claims or liens have been filed against it.

A title search is an examination of public records to determine and confirm the legal ownership of a property and to identify any claims against it. Inaccurate surveys and unresolved building code violations are two such examples of blemishes that can "dirty" a title.

Title insurance protects lenders and homebuyers against loss or damage caused by liens, encumbrances, or defects in the title or ownership of a property. Back taxes, liens (from mortgage loans, home equity lines of credit (HELOC), and easements), and competing wills are common claims filed against a title. In contrast to traditional insurance, which protects against future occurrences, title insurance protects against claims related to past events.

Typically, a basic owner's title insurance policy covers the following perils:

• Possession by a third party

• Documents bearing incorrect signatures, in addition to forgery and fraud

• Imperfect records 

• Restrictive covenants (terms that diminish value or enjoyment), including unrecorded easements

• Property encumbrances or judgments, such as pending lawsuits and liens

In lieu of title insurance, certain private transactions may involve a warranty of title, which is a seller's assurance to a buyer that the seller has the legal authority to transfer ownership and that no other party has any claim to the property.

Types of Title Insurance

There are two varieties of title insurance: lender's and owner's (including extended policies). Almost all lenders require the borrowers to purchase a lender's title insurance policy to safeguard the lender in the event that the seller was unable to transfer ownership rights legally. A lender's policy protects only the lender from loss. The issuance of a policy signifies the conclusion of a title search and provides the purchaser with assurance.

Since title searches are not foolproof and the owner remains vulnerable to financial loss, additional protection in the form of an owner's title insurance policy is necessary. While lender's title insurance is required to obtain a mortgage loan, owner's title insurance, which protects the buyer against title defects and is purchased by the seller, is optional.

As you continue to pay down your mortgage, you may want to consider purchasing owner's title insurance, as you now own a greater proportion of your property. Consequently, you have more to lose in the event of a claim. This is especially important if you intend to reside in your home for an extended period of time.

Purchasing Title Insurance

Upon completion of the property purchase agreement, an escrow or closing agent initiates the insurance process. Four major title insurance underwriters exist in the United States: Fidelity National Financial, Old Republic National Title Insurance Company, First American Title Insurance Company, and Stewart Title Guaranty Company. Additionally, regional title insurance companies are available for selection.

The cost of owner's title insurance ranges from $500 to $3,500, depending on the state you reside in, the insurance provider you select, and the purchase price of your home.

Frequently, both a lender's policy and an owner's policy are required to ensure that all parties are adequately protected. At closing, the parties will pay a one-time fee for title insurance. To prevent abuse, the Real Estate Settlement Procedures Act (RESPA) prohibits sellers from requiring the purchase of title insurance from a specific provider.

Despite the fact that your lender, attorney, or real estate agent may recommend a title insurance company, it is always advisable to shop around.

Risks of Not Having the Title Insurance

The absence of title insurance exposes parties to significant risk in the event of a title defect. Consider a homebuyer who searches for the home of their dreams, only to discover unpaid property taxes from the previous owner after closing. Without title insurance, this claim for delinquent property taxes falls solely on the buyer. Either they pay the delinquent property taxes or they risk losing their home to the taxing authority.

In a similar situation, title insurance protects the purchaser for as long as they own or have an interest in the property.

The lender's title insurance similarly protects banks and other mortgage lenders against unrecorded liens, unrecorded access rights, and other defects. If there are issues with the property's title and the borrower defaults, the lender is protected up to the mortgage amount.

Before proceeding with a purchase, real estate investors must confirm that a property's title is in good standing. Foreclosure homes, for instance, may have a number of outstanding issues. For protection against unanticipated claims against the title, purchasers may wish to purchase owner's title insurance.

What Are the Types of Title Insurance?

There are two varieties of title insurance: lender's and owner's (including extended policies). Almost all lenders require that the borrower to purchase a lender's title insurance policy to protect the lender in the event that the seller was unable to transfer ownership rights legally. A lender's policy protects only the lender from loss.

Since title searches are not foolproof and the owner remains vulnerable to financial loss, additional protection in the form of an owner's title insurance policy is necessary. Often purchased by the seller to protect the buyer against title defects, owner's title insurance is optional.

How Can I Buy Title Insurance?

Upon completion of the property purchase agreement, an escrow or closing agent initiates the insurance process. Frequently, both a lender's policy and an owner's policy are required to ensure that all parties are adequately protected. At closing, the parties have to pay a one-time fee for title insurance. The cost of owner's title insurance ranges from $500 to $3,500, depending on the state you reside in, the insurance provider you select, and the purchase price of your home.

Why Should You Purchase Title Insurance?

The absence of title insurance exposes parties to significant risk in the event of a title defect. Consider a homebuyer who searches for the home of their dreams, only to discover unpaid property taxes from the previous owner after closing. Without title insurance, this claim for delinquent property taxes falls solely on the buyer. The buyer is protected by title insurance for as long as they own or have an interest in the property. The lender's title insurance similarly protects banks and other mortgage lenders against unrecorded liens, unrecorded access rights, and other defects.