Title Insurance FAQs - Straight Answers for Home Buyers

By Brandon Cornett
© 2011 All rights reserved

What is title insurance, and who does it protect? Who pays for it? Do lenders require it? And what does all of this have to do with you, as a home buyer? You'll find answers to these questions and more in our title insurance FAQ library.

1. What is title insurance?

From a real estate perspective, a title is simply a right to ownership. So a title document grants ownership of a certain property to a certain person. By extension, title insurance protects the holder from any disputes over the ownership.

2. How does title insurance work?

These policies can do several things. The title search itself can find out who is authorized to sell the property, and what kind of title exceptions are in place (if any). This is done by searching the legal records for the property in question.

The owner's title insurance policy goes a step further than this. It gives the buyer protection against property ownership disputes. The owner's policy normally states that the insurance provider will defend against ownership claims that are outlined within the policy. Further, the title insurance company will reimburse the homeowner for losses resulting from such disputes (up to the amount stated in the policy).

Title insurance works differently from regular homeowners insurance. Home insurance offers coverage for damage that occurs after the policy's effective date. Title insurance, on the other hand, covers things that occurred before the policy's effective date (but were discovered later). Payment frequency is another difference. You only pay for title insurance once, and then you're covered as long as you own the home -- unless you refinance. This is obviously different from the annual premiums that come with a regular home insurance policy.

3. Why do I need title insurance?

As you make payments and grow your equity over time, you expose yourself to greater risk. That's because your equity is not covered by the lender's policy. If you choose not to obtain an owner's title insurance policy to protect your interests, you could lose a lot of money in a property dispute.

4. Do I need title insurance in order to get a mortgage loan?

Most lenders will require you to have basic title insurance coverage to protect their interest in the home. This is referred to as the lender's title policy. You can purchase additional coverage to protect yourself. This is referred to as the owner's title insurance policy. As a general rule, the lender's policy is required while the owner's policy is usually optional.

5. Who pays the cost of title insurance?

It varies from state to state, and sometimes among different counties within the same state. Sometimes it's the buyer, and other times the seller. Sometimes the cost is split: The seller will pay for the lender's title policy, while the buyer covers the cost of the owner's policy. These items are negotiable, and are therefore affected by the type of real estate market you're in.

6. How much does title insurance cost?

The average cost of title insurance varies by state. You can expect to pay anywhere from $1,000 to $3,000 for a standard policy. New York is one of the most expensive states (big surprise), with the average policy costing around $3,800.

To get a rough idea of the cost, you can also multiply the purchase price of the home by .005. Following this formula, a lender's title insurance policy for a $250,000 home would be approximately $1,250. Owner's coverage would add a bit more to this number. The cost is usually paid all at once, during the closing process. It covers you for as long as you own the home, or until you refinance.

8. Why do I need a new policy when I refinance my home?

You can keep the same owner's policy when you refinance your home. But you'll have to buy a new lender policy. Reminder: The difference between these policies is discussed in questions #2 and #4 above. The existing lender's title insurance policy will end whenever you pay off the loan. And that's exactly what happens when you refinance -- you pay off your current mortgage loan with a new one. So you need a new lender's policy in order to be approved for the loan.

9. Where can I purchase title insurance?

You can purchase title insurance from title companies. In some states, it's also possible to purchase a policy from a lawyers' groups. You can also get coverage through Entitle Direct (www.EntitleDirect.com).

Title Insurance Questions?

We hope you've enjoyed this guide to title insurance policies. If you have additional questions that were not answered above, you might want to use the search tool at the top of this page. You can also send your title insurance question to the editors by using our FAQ page.