What is Title Insurance in Real Estate?

It doesn’t matter if you are buying a commercial property for your business or a home for yourself and your family. You should know the importance of understanding what is title insurance in real estate, what it means for you, and what benefits it could bring you.

Given that, according to the HousingWire’s report, the title insurance industry paid out $352.5 million in claims during the first three quarters of 2021, it is clear that property owners benefit immensely from purchasing a policy when buying a new property. Had these owners not had a policy in place, they would have been forced to pay the claim costs on their own— all $352.5 million.

If you are buying a new property, title insurance protects you from any ownership issues that may arise after the transaction is complete. Remember that issues can surface even after you complete the purchase of the property, and those could be problems you least expect.

Suppose you represent the company offering a loan to buyers. In that case, we don’t even need to remind you how vital it is to have the future property owner purchase title insurance that protects you from any ownership-related issues.

However, if you still have doubts and questions about what is title insurance in real estate, let’s see how it works and what benefits it brings both owners and lenders in real estate transactions.

What is Title Insurance in Real Estate?

When buying or selling a piece of property, the title of that property is essential. “Title” is the term that refers to the legal ownership of the property. You want to ensure that the person selling the property to you is actually the owner and that there are no liens or other claims on the property.

When you work with a title company, they will look through the public archives and investigate the title for you. The documents they usually look through include mortgages, court judgments, deeds, tax records, divorce decrees, etc.

Should the title company find any ownership issues, they will try to remedy them for you. When that process is complete, the underwriter will provide you with the title insurance policy quote if they deem the property insurable.

You should note that even the best investigators can’t find every single problem with the property. Also, they can’t predict certain developments, such as a distant relative claiming their right to the inheritance from a deceased great-aunt.

That’s where insurance comes in handy. Title insurance protects you from any problems with the property’s title. It covers things like fraudulent deeds, mistakes in the public record, and any other issues that could affect your property ownership, such as building code violations or conflicting wills.

Title Insurance vs. Homeowners Insurance: What’s the Difference?

Title insurance and homeowners insurance are indeed two different types of insurance. Homeowners insurance covers your house in case of damage (interior and exterior) or theft and your personal liability for damage or injury to others on your property.

Title insurance protects you from any problems with the title of the property. Law does not require homeowners insurance, but lenders typically require title insurance.

Another difference is that you pay the title insurance premium just once when you buy the property. A homeowners policy premium, like many other types of insurance, is the premium you pay annually at your policy renewal. 

Who Needs Title Insurance?

Both buyers of the property and lender companies need title insurance. If you are buying property, title insurance protects you from any problems that could arise with the ownership title of the property. It also protects the loan provider who issues the mortgage on the property from any problems that could arise with the loan.

Based on the coverage they provide, we can distinguish two types of title insurance policies: the owner’s title insurance policy and the lender’s title insurance policy.

The owner’s title insurance policy is usually optional, but experts highly recommend that the property buyer has one in place. It responds to claims related to title defects that occurred before you bought the property. The policy is active for as long as you are the owner of the said property. 

Lenders typically don’t want to take anything for granted and want to protect their interests until the loan is paid or refinanced. So, if you are a lender, you want the borrower to purchase a lender’s title insurance policy to cover any potential losses you might experience should there be problems with the legal transference of the ownership rights.

Lenders might also need other insurance policies to protect their professional interests, like an errors and omissions (E&O) policy, for example. Otherwise known as professional liability insurance, the E&O policy provides coverage for professional errors or negligence claims or if a client alleges that your bad advice caused them financial damage.

What Does Title Insurance Cover?

Title insurance covers claims that arise after you purchase the property but that relate to events in the period before you were the legal owner. Here are the risks an owner’s title insurance policy typically covers:

• Conflicting wills or undisclosed or missing heirs
• Errors in public records
• Mistakes on the property deed
• Back taxes claims
• Falsified documents, forgeries, and fraud
• Unpaid contractor bills or homeowner’s association dues
• Outstanding judgments and liens
• Previous owner’s building code violations
• Unreleased prior mortgage

Even if a title company looked into all these possibilities before issuing a title insurance policy to you, the of something suddenly popping up still exists. The owner’s title insurance policy would cover the costs of defending or settling a potential claim up to the property value.

The lender’s title insurance covers any losses that the lender could suffer in case of an ownership dispute resulting in the new owner not legally managing to transfer the title of ownership rights.

How Much Does Title Insurance Cost?

Experts recommend that the buyers purchase the owner’s and lender’s title insurance together and take advantage of the discounted price when bundling the policies together. According to Value Penguin’s research, the average cost of a title insurance policy is about 0.5% to 1% of the property price, whereas the owner’s title insurance is about $1,000 on average.

It is important to mention again that the title insurance premium is only paid once when the property is purchased.

There are a few factors that affect the title insurance premium:

• State where the property is located
• Property price
• Transaction type (purchase or refinancing)
• Administrative fees and costs

Typically, a title insurance policy for the refinancing transaction should cost less than the one purchased when buying a property. A title agency had already researched the potential issues with the title, and there are no additional costs related to the investigation, so the premium is lower.

Considering that property ownership is at stake and that the cost of handling a claim against the title can be substantial, it pays off to buy title insurance, as it brings you some peace of mind for the future.

If you are a business owner, you can look into other policies that help safeguard your company’s financial well-being and protect you as a professional. You can also sign up to Embroker’s digital platform and get started by requesting online quotes for your desired policies.

For more information on insurance and real estate, check out our guides on real estate risk management and real estate insurance.