What is title insurance?

The successful transfer of ownership from the seller to the buyer is a critical part of the closing process. Problems with the title can come up even after closing, though, leading to disputes about who really owns the property. Title insurance is an insurance policy that protects both homebuyers and lenders if there are property title issues.

Title insurance definition

Title insurance is a policy that offers protection for the homebuyer and the mortgage lender if a legal dispute over the home's title causes them to have a financial loss. The title is a legal document that shows the ownership record of the house. Before closing, you’ll have to hire a company to perform a title search on the property.

How title insurance works

A title search company conducts thorough research of any legal ownership claims on the property before closing to ensure a smooth transition from one owner (the seller) to another (the buyer). This process essentially helps protect the buyer from assuming the past debts of the previous owners.

Title insurance offers a layer of security once the title search process has concluded. It gives you and the lender financial protection should an issue arise later concerning the ownership of the property.

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 $352.5 million in claims during the first three quarters of 2021.

It’s important to note that title insurance is different from homeowners insurance. 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.

Types of title insurance

There are two types of title insurance: owner’s and lender’s.

Owner’s title insurance 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.

There are other situations that could cause financial harm to the homebuyer, like a deed that was filed incorrectly or falsified information on the document. While owner’s title insurance is not required by law, you should strongly consider purchasing it to cover yourself in the event of a lawsuit concerning the property.

Lender’s title insurance protects the lender’s interest in the home in the event of title problems. If someone successfully claims ownership of the property, lender’s title insurance makes sure the lender is paid back what it’s owed. You’re usually required to purchase lender’s insurance if you have a mortgage.

How to buy title insurance

Most title companies offer these policies. You can shop around for quotes from various title companies, but be sure to research reputable firms by reading reviews from other customers.

To get recommendations for title insurance companies, you can ask your mortgage lender, real estate agent, or friends and family members who recently purchased a home. You’ll want to gather multiple quotes to find the best deal — shopping around could help you save hundreds of dollars in title services alone.

As you conduct your research, it’s essential to 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.

Title insurance costs

Title insurance premiums can cost anywhere between a few hundred to a few thousand dollars, depending on the home’s sale price and the state you live in.

Each state has its own regulations regarding title insurance premiums, but most total costs fall between 0.5% to 1% of the home’s price. On a $250,000 home, that could cost between $1,250 and $2,500.  The average cost is approximately $1,000 per policy, according to Realtor.com.

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.

Bottom line: Why is title insurance important?

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.