What is title insurance?

How title insurance works

The title is a legal document that shows the ownership record of a property. Lenders require a title search on a property before closing.

Even though a title search company conducts thorough research of any legal ownership claims on the property, title insurance adds another layer of security. It gives you and the lender financial protection should an issue arise later concerning ownership.

For example, the heir of a past owner could try to claim ownership of the property years after you’ve bought the home. This situation could take months to resolve in court — having an insurance policy can help you pay for the legal fees. According to the American Land Title Association, the title insurance industry paid more than $596.1 million in claims in 2022.

Title insurance vs. home insurance

It’s important to note that title insurance is different from homeowners insurance. Title insurance only covers issues with the title. It doesn’t cover damage to the home's physical structure or personal items lost during a covered event. You’ll have to purchase homeowners insurance separately.

» MORE: Homebuying checklist

Types of title insurance

There are two types of title insurance available for purchase:

• Lender’s title insurance, which is mandatory. It protects the lender's financial interest in the property. In the event of title problems or ownership disputes, lender's title insurance ensures the lender is reimbursed for the amount owed.
• Owner’s title insurance, which is optional. It covers the homebuyer and protects them if someone sues for a claim that occurred before they bought the home. For instance, a contractor may try to sue the new homeowner for a previous owner's unpaid balance for work done.

Both owner's and lender's title insurance should be purchased to protect against potential financial harm caused by title-related issues.

How to buy title insurance

When it comes to buying title insurance, it is one of the closing costs that you can shop around for to get the best price. To start, find a reputable title insurance company; your lender might have a preferred company it works with.

As you conduct your research, look for the credentials of each title company you’re considering — some scammers pose as real companies and try to steal your hard-earned money. The American Land Title Association can provide resources for your search, or you can check with your state’s insurance department to verify the legitimacy of local title search companies.

The title company will guide you through the process, letting you know which documentation about the property you need. Most companies will ask for the address, legal description and any relevant documents related to the title. With this information, the title insurance company will then conduct a thorough title search to uncover any potential issues or claims against the property.

Based on the results of the title search, the company will issue a title insurance policy to protect you against any future claims or disputes related to the property's ownership. It's important to carefully review the policy and ask any questions you may have before finalizing the purchase.

Title insurance cost

“Title insurance fees are regulated by most of our states but typically range from 0.50% to 1% of the home's purchase price,” said Melissa Cohn, regional vice president at William Raveis Mortgage. “While the title insurance fees are typically not negotiable, there are other title costs, such as endorsements and other miscellaneous expenses, that can be negotiated.”

Title insurance isn’t a recurring cost like most other insurance premiums — it's a one-time payment made during the closing process. Typically, the buyer pays for the lender’s title policy, and the buyer or seller may pay for the owner’s title policy.

» MORE: How much are closing costs?

Bottom line

Title insurance gives you financial protection and peace of mind regarding the ownership of your property. If you take out a home loan, you’ll likely be required to purchase lender’s title insurance to cover your mortgage lender, but you should also purchase owner’s title insurance for yourself. Issues with the title could appear long after you’ve moved into your home; as long as you have title insurance, you’re financially safe.