Title Insurance: The Basics

I have often found that many homebuyers lack a fundamental understanding about title insurance. While most past clients have admitted to briefly discussing the topic with their real estate agent, they don’t seem to understand its purpose or function–only that it will be an additional expense on the settlement sheet for which they are responsible.

What is Title Insurance?
Title insurance is a policy of insurance that protects against losses arising from defects in and/or claims against the title to property. Examples of such defects and/or claims include tax liens, easements, mechanic’s liens and ownership claims by third parties.

Lender’s Policy/Owner’s Policy
There is no legal requirement to purchase title insurance prior to acquiring a property. In practice, any lender will require you to obtain, at a minimum, a Lender’s policy of title insurance for an amount equal to the loan. This protects the lender’s investment in the event of a third-party claim. The insurance remains effective until the loan is repaid.

A homebuyer will also want to obtain its own protection of the equity in the property since a Lender’s only policy extends solely to the loan amount. This requires an Owner’s title policy for the full value of the home. Typically, the additional cost to add Owner’s coverage to the cost of the Lender’s policy is small; all the more reason for any homebuyer to get the necessary coverage. By way of example: If the sale price of a home is $500,000.00 and the homebuyer is borrowing $400,000.00—the title insurance policy would include Lender’s coverage in the amount of $400,000.00 and Owner’s coverage in the amount of $500,000.00.

Is title insurance similar to other types of insurance?
No. Most insurance policies protect against events that happen after the policy is issued, such as a car accident that happens 6 months after purchasing a new car. Title insurance in most cases protects against losses arising from events that occurred prior to the issuance of the policy. The coverage afforded by these policies typically does not extend into the future. The exception to this is certain enhanced title insurance policies, which offer coverage of a limited amount of future occurrences that are spelled out. All homebuyers should check the state in which they are buying in order to determine if such policies are available.

Is title insurance required for a refinance of the existing loan?
Yes. The lender will require you to purchase a new lender’s policy because 1.) the existing policy terminates upon the full payment of the mortgage and 2.) the lender wants to protect itself from any title issues that have arisen since you took title to the property. The good news is that you won’t need to obtain a new owner’s policy and title companies generally offer a discounted premium if your last policy was acquired within a certain amount of time.

What can I expect to pay for title insurance?
The premiums for title insurance policies are state specific. In some states, title insurance premiums include the actual insurance as well as the costs for a title search and title examination (to determine if there are any defects in the chain of title). In other states, the premium covers the insurance only and the homebuyer must also pay a third party company and/or attorney to provide the search and examination services.

Some states such as Pennsylvania and New Jersey strictly regulate rates and the premiums are the same regardless of the insurance carrier selected by the homebuyer. Other states do not regulate premiums and the homebuyer is wise to shop for the best available price.