A home title policy — also called title insurance — protects homeowners and lenders from claims and litigation stemming from title defects. Title insurance, according to the American Bar Association, allows for a secure transfer of ownership from one party to another.
To address top questions surrounding home title policies, we’ve compiled this guide. You’ll learn:
• What is title insurance for a home?
• How does it work?
• What are common title issues?
• What does the home title policy cover?
• What are the different types of home title policies?
By the end, you still won’t be thrilled to pay this additional cost at closing, but you may understand better what it protects.
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What Is a Home Title Policy?
A title policy on a home is an insurance policy that protects against title defects. Title issues aren’t common, but when they occur, the amount of money involved can be massive. Home title policies are required by lenders to protect their investment in your property. That’s right, just like mortgage insurance, it’s not really for you. In fact, these policies are also called lender’s title insurance policies.
Confusingly, you can also buy a home title policy that provides the exact same protection for you: This is called an owner’s title insurance policy. If you want to be completely protected as a homebuyer, you need to purchase both. (Ugh!)
What could go wrong that necessitates this layer of insurance? If, for example, the seller didn’t have the full right to sell the property because there was another property owner and the title company missed this in their title report, the title company is responsible for the error. The title company could pay for litigation costs or payouts for property owners.
Title issues that could potentially arise include:
• Existing mortgages
• Undisclosed heirs that have claims on the property
• Tax or construction liens
• Property line disputes
• Judgments involving the property, such as in the case of a divorce
• Deeds, wills, or trusts with errors
• Easements or encroachments that may restrict access and/or devalue the property
• Notary mistakes
• Errors in public records
• Fraud and forgeries
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How Does a Home Title Policy Work?
There are two parts to a home title policy: a title search and a policy issuance. After real estate purchase contracts are written and the property is in escrow, homeowners select a title company to conduct a title search.
In the title search, the title company looks through public records for defects (or problems, like those listed previously). If the search turns up a mortgage lien issue, judgment, or other issue, it will need to be addressed before ownership can be transferred.
If the title search hasn’t revealed any issues, the title company will issue the policy when the transfer of ownership is recorded. The borrower pays a one-time fee for the home title policy in their closing costs.
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What Does the Home Title Policy Cover?
The title search helps eliminate risk, but it’s still a possibility that title problems can arise. That’s where the title policy for a home comes in. After the policy has been issued, should any additional items come up, the title company will litigate those issues for the benefit of the lender — but only up to the amount of the loan. As the loan balance decreases, so does the amount of home title insurance coverage.
One important thing to note is the home title policy that you get is usually a lender’s title insurance policy. What this means is the lender is protected against legal claims against the home. The borrower’s claim to the home — their equity — is not protected unless the borrower also purchases an owner’s title policy.
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Home Title Policy Requirements
Home title policies aren’t required by a governing body like a city or state — they’re required by the lender. When a borrower seeks funds for a home mortgage loan, the lender has certain requirements that the borrower must meet in order for them to issue that mortgage. One of these is a home title insurance policy. Borrowers must pay for a home title policy in order to close the loan. Lenders want to make sure the property the borrower selected is free to be bought and sold and their investment is protected.
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Pros and Cons of a Home Title Policy
It’s worth summing up the benefits and drawbacks of a home title policy.
| Pros | Cons |
|---|---|
| The title search can reveal title defects before you close on a home. | Home title policies are required. |
| The title insurance can litigate up to the amount of the mortgage if there is an issue. | They’re expensive. |
| If it’s a lender’s home title policy only, it won’t protect the equity in your home. |
When buying a home, you’ll encounter lots of different types of insurance. It’s worth taking a few minutes to familiarize yourself with the definitions.
Types of Home Title Policies
As noted above, home title policies come in two types: lender’s title insurance and owner’s title insurance.
Lender’s home title policies protect the lender from losses that come from title issues or defects. If title issues arise, the title company will cover losses or litigate for the lender up to the amount of the mortgage.
Owner’s home title policies protect the amount of equity an owner has in the home. If someone has a claim or brings suit against the title of the home, it is possible homeowners could lose the amount of equity they have in their home.
Fees for these policies vary widely by state. But for a typical home valued at around $400,000, you can expect to pay about $2,000 to purchase both types of title insurance and to pay for the title search. Fortunately, this is a one-time cost — unlike other types of homeowners insurance you might buy, you won’t have to renew your title insurance every year.
The Takeaway
It’s not exciting to pay for a home title policy, but the expense is more palatable once you understand what it protects. If you purchase both lender’s and owner’s home title policies, you’ll be well protected in the event of an unexpected claim or ownership dispute on your new home.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
Is it worth shopping around for title insurance?
Title insurance can be costly so it is worth it to shop around. The insurer your lender typically uses might be an affiliate. So there could be a financial benefit to your lender if you use their partner company, but that doesn’t mean there will be a financial benefit to you. Comparison shopping could save you money.
What is the disadvantage of title insurance?
The chief disadvantage of title insurance is its cost, and the fact that it is usually required by a lender. Beyond that, keep in mind that lender’s title insurance only covers the lender in the event of a title problem — it doesn’t protect the equity that you have in the home. For that, you would need a second owner’s title insurance policy.
What is the difference between title and mortgage insurance?
Lender’s title insurance, which is paid for by the borrower, protects the lender in the event that a title dispute arises on the property. Mortgage insurance protects the lender in the event that the borrower defaults on the loan.
Photo credit: iStock/Wasan Tita
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
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