What Is Title Insurance? And How Much Did You Say It Was?!

You, like many consumers, may wonder what Title Insurance really is and how much it costs. You may also cringe at the cost when you find out what it is. Yes, several thousands of dollars is definitely a lot of money. But it's a drop in the bucket when compared to the loss you could be facing should their be a claim or an issue, which could cost you hundreds of thousands of dollars.

So what is Title Insurance?

As defined by Wikipedia,

"Title insurance in the United States is indemnity insurance against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage liens. Title insurance is principally a product developed and sold in the United States as a result of the comparative deficiency of the US land records laws. It is meant to protect an owner's or lender's financial interest in real property against loss due to title defects, liens or other matters. It will defend against a lawsuit attacking the title as it is insured, or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy."

In layman's terms, Title Insurance is what covers you against a claim against the property.

The good thing about Title Insurance is that rather than you fighting the claim (which can cost tens of thousands of dollars), the Title Insurance company handles it for you. You don't have to waste your time, energy or money worrying fighting the claim. In addition, if the claim proves to be valid, you will be reimbursed for your actual loss up to the face amount of the policy.

Title Insurance is divided into two parts, Owner's Title Insurance and Lender's Title Insurance. Let's look at the difference…

Lender's Title Insurance

• Covers the lender's interest in the property (if the loan is for $400K, it covers the lender's interest up to $400K)
• As a borrower/buyer, you are required to purchase it in order to receive financing
• Unless you're not getting lender financing, there's no getting out of this one. And the lender always passes the buck to the borrower/buyer (sorry folks)

Owner's Title Insurance

• Covers the borrower's/buyer's interest in the property up to the purchase price (if the loan is for $400K, but the purchase price is $500K, it covers the buyer all the way up to $500K)
• This type of Title Insurance is optional. It's up to you whether you buy it or not, but it's strongly recommended (I'll cite examples of why in a future post)

In addition, there is what's called "Standard" and "Enhanced" Owner's Title Insurance. Depending on who the Title Insurance provider is and what their coverage is like, you'll want to go with either "Standard" coverage or "Enhanced" coverage.

"Standard" coverage typically covers you up to the sales price at the time of settlement. If you bought the property for $500K, but it's worth $650K in 7 years, you'd still only be covered up to $500K. If there was a claim up to the full market value of $650K, you may be liable for the difference of $150K.

On the other hand, "Enhanced" coverage does cover the appreciation of the property up to a certain amount over a certain time frame. You'll typically see language similar to,

"The property is covered up to ____ percent appreciation per year over ____ years."

Also, most "Standard" policies do not cover Mechanic's Liens while "Enhanced" policies do. Mechanic's Liens are liens put on the property by contractors that claim to not have been paid by the previous owners/builder whom they provided services for. These are the most common types of liens found on properties.

What's important to know is that these types of liens follow the property, not the owner. So if the seller skipped out on their tab to the carpenter who fixed the deck as part of your Home Inspection contingency, you would be liable for it (unless you had Title Insurance that covered Mechanic's Liens).

So how much does Title Insurance cost?

Typically, Title Insurance is calculated as a dollar amount per $1,000 of the loan amount and/or purchase price. Generally speaking, Title Insurance (Lender's and Owner's combined) costs about 0.5 percent of the total purchase price*. For example, if the purchase price is $500K, the cost would be about $2,500.

*Please note that these figures are general. The actual cost depends on who the Title Insurance provider is, their specific rates and what type of coverage you get, "Standard" or "Enhanced". Shop around and compare rates and coverages if you can.

So, that's Title Insurance and the costs involved in a nutshell. If you have further questions or concerns, don't hesitate to contact me.

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Case Study: Why Owner's Title Insurance Is So Important