Buying a house is one of the most important financial decisions you’ll make in your lifetime, whether it’s your first home or your forever home. Protecting that investment is critical, and that’s where title insurance comes in.
What Is Title Insurance in Real Estate?
A title is like a property’s report card, tracking ownership history and proof of payments. Unlike homeowner’s insurance, which protects against future damages to your property, owner’s title insurance offers protection from past events that may pose a threat to your status as owner, including liens, encumbrances or any other title defect missed during the search process. Lender’s title insurance does the same for your loan company and is often required for a mortgage to be approved.
While most title insurance companies follow the standard policy set by the American Land Title Association, some companies offer slightly different or even enhanced policies. As a homebuyer, you have the power to decide which title insurance provider you’d like to work with, and “local expertise and customer service standards are important factors to consider,” says Marcus Ginnaty, spokesperson for First American Title Insurance Company. Although owner’s title insurance isn’t required, it’s your best protection against issues that could put your property rights — and your wallet — in jeopardy.
What Can Go Wrong with a Home’s Title?
Do you know who the first owner of your house was? Do you know if they paid all their taxes? If not, you need a title search. Over the course of a property’s lifetime, it can incur unpaid balances, be the subject of a forgery or have unknown boundary disputes, among a host of other issues known as title defects. Illegal prior deeds or undiscovered wills that reveal missing heirs can challenge your status as the property’s owner. Even if a home has already changed hands many times, issues like these are sometimes overlooked in previous searches, “so they go unfixed,” Ginnaty says. “That is where title insurance coverage matters.”
How Title Insurance Protects You: Claims and Common Coverage Scenarios
The title company’s goal is to resolve any title defects before a sale closes, but issues can still arise after the fact that may demand financial or even legal attention. If you have title insurance, you could be protected from paying legal fees for an unexpected problem. Your exact coverage and exceptions to the policy may vary depending on your state and insurance company, but most title insurance policies cover the following common claims:
Financial Encumbrances
A financial encumbrance is any monetary lien that’s been levied against the property, whether it’s for unpaid mortgages, taxes, construction costs or open lines of equity. If, for instance, an unknown maintenance lien from a prior owner’s kitchen renovation surfaces after closing, your title insurance policy protects you from having to pay the amount or any associated legal fees yourself.
Easements and Access Issues
While most easements are accounted for during the search and survey process, there are a few scenarios where unrecorded easements can interfere with your ownership rights. Should a neighbor claim that the previous owner granted them an easement on your property, your title insurance policy may offer some protection and help with legal fees if the issue escalates.
Disputed Claims of Ownership
There are a few ways in which another person can claim ownership over your property. If a missing heir or previously undiscovered will is found, it may lead to a dispute over rightful ownership, one that your title insurance company can help you resolve. The same thing can happen with the land itself, if someone claims to have proof of ownership over the land prior to your home even being built. Boundary issues, which can sometimes be caught early with a proper survey, can also lead to ownership disputes.
Fraud and Forgery
Whether it’s a fraudulent sale, a forged deed, wire fraud or identity theft, instances of fraud and forgery can wreak havoc on your homebuying process. For example, suppose you discover after closing that the previous owner’s wife forged her husband’s signature on home sale documents. Although that action is illegal, it doesn’t void the sale or your right to ownership. Your title insurance policy can help you deal with the necessary legal fees to resolve the issue.
Closing, Search and Public Record Errors
Title examiners, underwriters and lawyers are only human. Unfortunately, that means mistakes during the search or closing process are always possible, making it even more important to have title insurance. Something as simple as a misspelled name or a lack of proper notarization can complicate your status as the property owner, but your policy is there to help protect your interests while the paperwork gets fixed.
Does Title Insurance Cover an Existing Mortgage?
The majority of title insurance policies are purchased at closing time, so title insurance is generally not applied to existing mortgages. “While it may be possible to get it later, asking for coverage after closing can pose challenges,” Ginnaty says. However, a new policy can be granted when you refinance your home, and the title company can adjust its coverage to account for any increased property value.
Is Title Insurance a One-time Cost?
Yes, you only have to pay for title insurance once, and the policy lasts as long as you own the property. Both lender’s and owner’s insurance can be purchased at the same time, but policy prices vary depending on the cost of the property and the amount of your mortgage loan. According to Forbes, the total usually constitutes 0.5% to 1% of the home’s purchase price. As of March 2024, the national median home price sits at about $384,000, so the average title insurance policy can cost homebuyers between $1,920 and $3,840. “Some title insurance providers offer enhanced title insurance policies, such as First American’s Eagle Policy or an ALTA Homeowner’s Policy, which include coverage for additional risks” and usually cost a bit more, Ginnaty says.
The Role of the Title Company: Facilitating a Smooth Closing
Once the property’s purchase agreement is complete, the closing attorney usually initiates the policy process, working directly with the title company and underwriter to ensure that everything is done properly and on time. Most title searches take no more than a few days, although a severe or challenging defect may take longer to resolve. If there’s a complicated history to sort out, the resolution may delay your closing by a few days. “Thankfully, this is rare,” Ginnaty says.
The Title Search Process: How Title Insurance Companies Investigate Ownership
By reviewing detailed public records, title examiners can trace a property back to its original owner and ensure that no one else can stake a claim to your house. Clearing any title defects, such as unpaid liens, “often happens behind the scenes, and the homebuyers are unaware of these efforts,” Ginnaty says. But with the purchase of an owner’s title insurance policy, you’ll also have protection against a laundry list of costly claims that pop up after closing on your new home.
What is a Title Defect? Understanding Common Ownership Problems
A title defect is anything that threatens a single party’s right to own or sell a property and can be a result of outright fraud or an honest mistake. Either way, defects that cloud a title need to be cleared before a sale can continue. Here are some of the most common ownership problems that lead to title defects:
- Liens of any kind, including unpaid taxes, mortgages, utility bills, child support, maintenance work or any other debt.
- Encumbrances such as unknown easements, a disputed boundary or covenant restrictions set forth by an HOA.
- Clerical errors like misspelled names, incorrectly filed records or lack of proper notarization.
- Fraud in the form of illegal deeds, forged signatures, falsified information or impersonation of a previous owner.
- Complications from an undiscovered will, which can lead to ownership disputes by a previously unknown or missing heir.
- Any break in the chain of title, such as a missed deed of trust, improperly recorded information or outdated survey reports.
What Happens If There’s a Title Defect After I Close?
If a title defect is found after you’ve closed on your new home, you may have to undergo time-consuming and expensive mitigation efforts to resolve the defect. “In rare instances, a significant title defect may require going to court,” Ginnaty says. This makes it even more important to protect yourself with a title insurance policy, which will allow you to submit a claim about the new defect. For complex issues, it may be prudent to discuss your options with a real estate or closing attorney to ensure you come out the other side with a clean title.
Hannah Rainey is an experienced writer and copy editor who has researched and written about hundreds of neighborhoods nationwide. After graduating from Virginia Commonwealth University with a degree in English and a focus in creative writing, Hannah received a certificate in editing from The Poynter Institute in conjunction with ACES: The Society for Editing. When she’s not reading or working on her novel, Hannah can usually be found painting or tending to her garden at her home in Henrico’s Highland Springs neighborhood.
