Who Pays for Title Insurance?

Title insurance is one of those closing costs in a home purchase you don’t love spending extra cash on but are grateful for when issues crop up. Lenders require borrowers to take out a title insurance policy in case there’s an ownership dispute after closing.

And although homebuyers typically pay for this coverage, there are some instances, depending on where you live, where sellers might cover the cost.

What Is Title Insurance?

Title insurance protects lenders and homebuyers against potential legal challenges to property ownership. This could include undisclosed liens, forged documents, recording errors or even fraudulent property transfers.

“Your home may be new to you, but every property has a history,” says Marcus Ginnaty, senior strategic communications manager with First American Financial Corporation. "And, in some cases, that history may include title issues that, if not identified and addressed, can be used to challenge your property ownership rights."

There are two types of title insurance coverage:

• Owner’s policies: protect the owner, as the name suggests, and

• Lender’s policies: protect the lender’s loan amount

Each type of coverage serves different purposes and covers different forms of title risk.

The cost of title insurance typically includes not just the policy premium but also fees for the title search, examination and other related services. This upfront work is done to uncover potential ownership issues before you seal the deal.

Owner’s Title Insurance

Owner’s title insurance protects your financial investment in the home for as long as you (or your heirs) have an interest in it. While this coverage is optional, most real estate agents strongly recommend it.

When deciding if owner’s title insurance is right for you, consider the property’s age, its history of ownership and your personal risk tolerance. For most buyers, the one-time premium is worth the peace of mind and financial protection, especially if an issue pops up later on.

Lender’s Title Insurance

Lender’s title insurance protects the bank or mortgage lender issuing your home loan in case an ownership dispute arises, according to the Consumer Financial Protection Bureau (CFPB).

"A lender's policy, often called a loan policy, is required by most lending institutions as a way to insure their right to foreclose on a property if the owner fails to repay the mortgage loan," Ginnaty says. "This policy protects the bank or other lending institution for as long as they maintain an interest in the property, typically until your mortgage is paid off."

Even though you typically pay for the lender’s title coverage, this policy doesn’t protect your financial interests. And even with a lender’s title insurance policy in place, you could still be on the hook to defend against title claims.

Who Pays For Title Insurance?

Homebuyers typically bear responsibility for paying for title insurance premiums. However, this might vary depending on location and state law.

For instance, in southern states like Texas, sellers pay for the owner’s policy. In northern states, the buyer often covers both policies. In parts of California, though, buyers and sellers split this closing cost down the middle.

Regardless of who pays for it, title insurance is a closing cost you can shop around for and can negotiate as part of a home purchase. In competitive markets, sellers might offer to cover title insurance to sweeten the deal for potential buyers.

How Much Does Title Insurance Cost?

Title insurance typically costs a median of 0.67% of the home’s purchase price according to data from Fannie Mae. For example, on a $300,000 home, you might pay around $2,010 for an owner’s policy. Unlike mortgage insurance, which involves annual premiums, title coverage is a one-and-done deal.

"In general, each policy price is based on the purchase amount of the home (for an owner's policy) or the total amount of the loan (for a loan policy)," Ginnaty explains.

Here are other factors that affect the cost of title premiums:

• Property location and local regulations

• Property purchase price

• Loan amount

• Type of policy and protection options

In addition to the insurance, your title fee might include real estate settlement charges, such as courier charges or wire transfer fees.

When and How Do You Pay Title Insurance?

Title insurance is a third-party fee (not charged by the lender but by the title insurer) paid as a one-time premium within your overall closing costs. When you apply for a mortgage, your initial loan estimate spells out title and settlement costs, however, you can shop around with other insurers for a better deal.

Related: How Much Are Closing Costs for a Conventional Loan?

The Title Company’s Part

Title companies play a key role beyond issuing the title policy. Title agents scour public records to do a title search, confirming the seller has the legal right to transfer ownership of the property before the transaction closes. If the title agent finds issues, they work with both parties to resolve them so the transaction closes smoothly.

"A large share of the one-time premium paid for an owner's title insurance policy goes to fund the title search and additional legwork required to thoroughly research the property's title," Ginnaty says.

However, if issues arise after closing, the title company goes to bat for you, providing legal defense against covered claims that could threaten your ownership.

"Title insurance coverage includes a 'duty to defend,' meaning the title insurer will hire lawyers and pay defense costs for the homeowner for matters covered by the policy," Ginnaty notes.

This investigative and defensive role sets title insurance apart from other types of coverage (such as a homeowner’s insurance, for instance) which only offer financial compensation after a covered loss.

Is Title Insurance Mandatory?

Title insurance is not always mandatory. Conventional loan agency Fannie Mae allows mortgage borrowers to provide an attorney opinion letter meeting certain guidelines. However, the lender may still require title insurance due to its internal rules or because the borrower is receiving a different loan type.

While the lender’s title policy is often difficult to skip, owner’s title insurance is less so. It’s optional, but still highly recommended. Nearly 70% of all buyers opt for the extra owner’s policy, Ginnaty says.

Consequences of Not Getting Title Insurance

Without owner’s title insurance, you face significant financial risk if title problems pop up after closing.

"For most families, paying thousands of dollars to lawyers to protect their ownership rights would be financially challenging and, for some, impossible," Ginnaty cautions.

Without an owner’s title policy in place, you might face:

• Legal fees to defend your ownership in court

• Settlement costs to resolve claims

• Potential loss of your property (and having to move unexpectedly)

• Inability to sell or refinance your home until title disputes are resolved

Common title issues that could be costly include recording errors, unknown property liens, fraudulent deeds, missing heirs, unknown easements, forgeries or even a secret will from a past owner.

Should You Get Title Insurance?

Many industry professionals strongly recommend title insurance, and often, you may not be able to opt out.
Even if you can bypass a lender’s policy using an attorney opinion letter, most homebuyers should purchase an owner’s title insurance policy to protect the home (and likely what will become their most valuable asset).

Even if you’re buying a new home, title insurance is still crucial; the home might be brand new, but the land it sits on might have a history of ownership disputes you’re not aware of.

For enhanced protection, Ginnaty recommends that homebuyers take it a step further.

"If they are buying a home, select a title insurance policy with fraud coverage. Specifically, ask your title company if a First American Eagle Policy or similar policy, such as the ALTA [American Land Title Association] Homeowner's Policy, is available, which also provides limited coverage for forgery and impersonation fraud after you purchase your property."

While title insurance is another added cost to your home purchase, the up-front investment could be a prudent one that protects you from a financial nightmare later.