Title insurance is a one-time policy you buy at closing that protects you and your mortgage lender against ownership problems rooted in a property’s past, including forged deeds, unknown heirs, unpaid liens from prior owners, and errors in public records. Unlike homeowners or auto coverage, which pay for things that happen after you buy the policy, title insurance covers defects that already exist on the day you close but haven’t yet been discovered. Lenders require their own policy before they’ll fund a mortgage. You can also buy a separate owner’s policy to protect your equity, and in most situations you should.
How It Works Differently From Other Insurance
Most insurance charges you every month to cover future risks. Title insurance flips that. You pay a single premium at closing, and the coverage looks backward: a forged deed from 20 years ago, an heir nobody knew about, a contractor lien that was never properly released.
Most of the title company’s work happens before the policy is ever issued. It researches the property’s ownership history, identifies problems, and clears as many as it can. Examiners review deeds, mortgages, tax records, court judgments, and probate filings to confirm the seller has the legal right to transfer ownership. They also look for errors in prior documents, unreleased mortgages from previous owners, and easements that give someone else the right to use part of the property. Anything that can’t be cleared before closing gets listed as an exception in the policy, meaning it won’t be covered.
Because so much is resolved up front, title insurers pay claims far less often than other insurers. But when a claim does hit, your entire investment in the home can be on the line.
Lender’s Policy vs. Owner’s Policy
There are two policies, and they protect different people.
A lender’s policy protects the mortgage company’s financial interest in the property. If a title defect surfaces and the lender can’t recover its loan amount, the policy covers the loss. Virtually every mortgage lender requires this policy as a condition of funding the loan.1Consumer Financial Protection Bureau. What Is Lender’s Title Insurance? Its coverage amount equals your loan balance and shrinks as you pay down the mortgage. Once the loan is paid off, the policy terminates.2National Association of Insurance Commissioners. The Vitals on Title Insurance: What You Need to Know
An owner’s policy protects you. It covers your equity if a covered title defect threatens your ownership, and it also pays the cost of defending your title in court. The coverage amount typically matches the purchase price, and the policy stays in effect as long as you or your heirs have an interest in the property. It’s optional. Skipping it means paying out of pocket to defend your ownership, or absorbing the loss entirely, if a problem surfaces after closing.1Consumer Financial Protection Bureau. What Is Lender’s Title Insurance?
There’s also an enhanced (sometimes called “homeowner’s”) policy that extends further than a standard owner’s policy. It may cover certain risks that arise after closing, such as someone forging your signature on a deed, building permit violations by a prior owner that surface later, or encroachments discovered after purchase. It costs more, and it can also remove some standard exceptions that a basic policy leaves in place.
What Title Insurance Covers
A standard owner’s policy covers financial losses from defects that existed when the policy was issued but weren’t known to the buyer. The most common covered risks are:
- Undisclosed heirs of a prior owner claiming an ownership interest.
- Forged or fraudulent deeds, releases, or other documents in the property’s history.
- Recording errors, such as incorrect legal descriptions, transposed names, or missing signatures.
- Undisclosed liens from prior owners, including tax liens, judgment liens, or contractor liens that didn’t turn up in the title search.
- Defective prior transfers, such as a deed signed by a minor or a person declared mentally incompetent.
Beyond paying for losses, the policy covers the cost of defending your ownership in court. The insurer pays the attorneys and the litigation costs. Real estate defense can run into tens of thousands of dollars even when you ultimately win, so this piece of the policy often turns out to be the most valuable.
What It Doesn’t Cover
Some gaps in title insurance are built into every standard policy and can’t be negotiated out:
- Government regulations, including zoning laws, building codes, and land-use restrictions. If a zoning rule blocks your plans for the property, the standard policy won’t help.
- Problems you create yourself, such as a new easement you grant or a new lien you take on.
- Future events. A lien placed on the property after closing, or a boundary issue that develops later, falls outside standard coverage.
On top of those exclusions, each policy carries exceptions listed in Schedule B. Standard exceptions typically include property taxes assessed after your purchase, boundary or survey issues that a physical survey would reveal, mineral rights previously reserved by a prior owner, and mechanic’s liens for work done around the time of closing. Special exceptions are specific to your property. Common ones include existing easements for utilities or shared driveways, homeowner association restrictions and dues, and the lien for your own mortgage. Those items showed up during the title search and are disclosed rather than insured against.
What It Costs and Who Pays
Premiums typically run 0.5% to 1% of the purchase price. According to Treasury Department data, the average cost for title and settlement services, including the lender’s policy, is roughly $1,900.3U.S. Department of the Treasury. Exploring Title Insurance, Consumer Protection, and Opportunities for Potential Reforms The exact price depends on the property’s value, its location, and your state. Title insurance is regulated at the state level, and pricing models vary. Some states set mandatory rates every insurer must charge. Others let companies file their own rates subject to regulatory approval.
If you buy both an owner’s policy and a lender’s policy at the same time, most title companies offer a “simultaneous issue” discount. The second policy is issued at a reduced rate, and the savings show up on the closing disclosure.
Who pays isn’t set by any national rule. In some areas, the seller traditionally covers the owner’s policy as part of delivering clear title. In others, the buyer pays for both. Regardless of local custom, it’s negotiable in the purchase contract.
Read the Title Commitment Before Closing
Before issuing the policy, the title company produces a title commitment (sometimes called a preliminary title report). It lays out the basic transaction details, the requirements that must be met before the policy can be issued, and the exceptions that will be carved out of coverage. The exceptions section is the one to read closely. Anything listed there is explicitly not covered. If you see an exception you don’t understand, ask the title company or your attorney to explain it before you sign. Some standard exceptions can be removed with an endorsement or an enhanced policy for an added fee.
Title Insurance When You Refinance
When you refinance, the new lender will require a new lender’s title insurance policy, even if one was issued when you bought the home. The old policy protected the previous lender on the previous loan and doesn’t transfer.
Most insurers offer a reissue or short-term rate discount when you can show that a prior policy was issued on the property within a certain window. The discount typically ranges from 10% to 50% off the standard rate, depending on how much time has passed. You don’t have to use the original title company to qualify, so keep the paperwork from your purchase where you can find it.
Your owner’s policy from the original purchase stays in effect through a refinance. You don’t need to buy a new one.
You Can Choose Your Own Title Company
Under RESPA, the seller cannot require you to use a specific title insurance company as a condition of the sale.4Consumer Financial Protection Bureau. Regulation X – Real Estate Settlement Procedures Act You have the right to shop. The same law prohibits kickbacks and fee-splitting among settlement providers, so no real estate agent, lender, or attorney can receive a referral fee for steering you to a particular company.5Office of the Law Revision Counsel. 12 USC 2607 – Prohibition Against Kickbacks and Unearned Fees
Your agent or lender will usually recommend a company, and that recommendation is often fine. In states where rates are set by law, the price difference between companies will be small, but the thoroughness of the title search and the responsiveness of the staff still vary. If you want to compare, you’re entitled to.
Filing a Claim
If a title problem surfaces after closing, contact the insurer listed on your policy promptly. The policy includes reporting instructions, usually in the conditions section. When you notify the company, give them the property address, a description of the issue, copies of any legal notices or claim documents you’ve received, and a copy of your policy.
Don’t wait. If someone serves you with a lawsuit challenging your ownership, or a previously unknown lien appears, contact the insurer immediately rather than trying to handle it yourself. The insurer has a duty to investigate and, if the issue is covered, to defend your title or resolve the defect. That might mean paying off a lien, negotiating with a party who claims an interest, or hiring attorneys to represent you in court. Many title claims never reach litigation. They’re resolved through administrative corrections at the county office or negotiated settlements where the insurer pays to release the claim.
If the insurer denies the claim, it should tell you why. The usual reasons are that the issue was listed as an exception in Schedule B, arose after the policy date, or falls within a standard exclusion. If you disagree with the denial, you can appeal through the insurer’s process or consult an attorney about your options.