Title insurance is different from other types of insurance because it emphasizes risk prevention instead of risk assumption. Title insurance emphasizes loss prevention by eliminating risks caused by title problems arising from past events. According to the American Land Title Association (ALTA), approximately 25 percent of all residential real estate transactions have issues with the title. The issues are resolved by title professionals before closing. Since title research companies resolve most of the title issues prior to closing, people might wonder why they need title insurance.
There are six basic ALTA policies of title insurance including:
- Lenders Leasehold
- Owners Leasehold
- Construction Loan policies
Also, a special policy has been designed for use by the U.S. government in its purchases and condemnations.
What is title insurance?
Title insurance is a type of insurance that protects the insured from financial loss related to owning a property. The title insurance policy covers third-party claims on a property that might not have shown up on an initial title search.
There are two types of title insurance:
- Lender’s title insurance is required by the mortgage lenders since they assume the largest amount of risk in a home sale.
- Owner’s title insurance is optional but it's still common. It protects the buyer from title issues.
Why do you need title insurance?
Before a property deal closes, the title research company searches the public records including deeds, mortgages, divorce decrees, child support orders court judgments, and tax records. It tries to find any title defects. If the company finds anything, then you have to resolve the issues by working with the seller or seller’s agent. If the company doesn’t find any defects with the title, it will give a clear title. So, why do you need title insurance when the title research company has given its approval?
There could still be outstanding claims or title defects due to an undiscovered issue. The current owner might not be aware of this defect. Sometimes, years after purchasing a property, an undiscovered issue might cloud the title of the property. There might be a pending lawsuit, an unreported lien, or an unintentional error in recording or filing documents. In rare circumstances, an oversight might also have been committed by the title researcher.
If a title defect surfaces after a loan closing, there could be a variety of legal costs. Therefore, lenders insist on title insurance. Having title insurance is an added layer of security.
What title insurance costs
Title insurance is a one-time cost and it doesn't have regular premiums. Usually, the cost of ownership title insurance is incurred by the seller. However, the prices and discounts of title insurance vary from state to state. According to CourtHouseDirect.com, it could cost somewhere between $1,000 and $4,000 for title insurance. According to the ALTA, the owner’s and lender’s policies both usually cost about 0.5 percent–1.0 percent of the home’s purchase price.