Getting Title Insurance at Closing: A Waste of Money? (Q&A for Home Buyers)

Your deed is a valuable document. It puts the title to a home in your hands. And, like most possessions, the title to your real estate can be insured.

Does Every Home Have Title Insurance?

No. But if you finance a home with a mortgage, the home becomes collateral for a lender. So, you must pay for title insurance at closing so your lender is covered against unknown title flaws.

This means as long as there’s a mortgage, there’s title insurance. But the beneficiary is the lender. The borrower doesn’t get protection from a lender’s policy.

Why Does a Mortgage Lender Get Title Insurance on My Home?

By ordering title insurance, lenders protect themselves against risks such as liens that might not have been exposed during the title search. Liens signify unpaid debts or fees — obligations left unresolved from the course of a prior ownership, attached to the title. These obligations relate to things like past property taxes, homeowners’ association fines, or construction companies’ claims.

Similarly, old court judgments might have been left unresolved. Or some lost heir, or maybe a business, could have a claim to the property.

A lot can happen in the history of deeds. Once in a while, the normal title search process misses something important.

So, When I Pay Off the Mortgage, My Home No Longer Has Title Insurance?

If the only policy you get at closing is lender’s title insurance, then that’s true. A lender’s policy is only good to the extent that there’s a balance on your loan.

Once you pay off your entire mortgage, your home no longer has title insurance.

Because the beneficiary of a lender’s title policy is… the lender.

You need to know this when you first finance the home you’re buying. You do have an opportunity at closing to get an additional policy — one that will protect the home beyond the span of a mortgage. More on this in a moment.

I’m Not Thrilled About Covering the Lender. Can I Get Out of Paying for a Lender’s Policy?

Probably not. (But see more details below, where we discuss exceptional states.)

Now, it’s possible that the seller will cover the title insurance for you. Ask your real estate agent or title company what’s normal in your state.

Ultimately, of course, you’re buying the home and covering the lender’s costs. So, all things considered, most mortgage companies do expect buyers to cover a lender’s title insurance policy. Their loan, their terms!

As a Deed Holder, Can I Get Title Insurance That Covers My Risks?

Yes. Consider getting an owner’s title insurance policy. It just takes a one-time premium, paid at closing. Check out the price of the title insurance you might expect for a given home’s location with this calculator from California-based First American Title^TM, the largest U.S. title company.

Unless you are buying into a place where the state regulates pricing, you’re free to shop around for title coverage from a company licensed in the state. But note that you’d normally get a discount on a bundle if both the lender’s and owner’s policies come from the same company. Expect the title research and insurance policy bundle to cost up to 1% of the price of the home.

Let your real estate agent know early in the house-hunting game if you plan to work with an insurer of your choosing.

How Will Insurance Protect My Deed?

Owner’s title insurance covers the deed holder against the cost of resolving a significant title flaw. Say a company or agency filed a lien against your home, but you weren’t aware when you bought the home. The title insurer protects you in case of legal action from that entity.

Owner’s title insurance will cover your interests as long as you hold the deed. Your heirs, when they hold the real estate, can even make claims.

Usually this policy covers the entire property value. You can ask your insurance agent about coverage that accounts for inflation of your home’s value over time.

Is the Coverage Only for Past Defects That Weren’t Discovered?

Title insurance covers undisclosed restrictions on how you may use your property, or unknown liens and easements. It’s a hedge against surprise claims — say, from some earlier owner’s heirs. But what about a defect that shows up after you buy? For that, it all depends on whether you choose a standard policy or an extended policy.

An extended owner’s title policy covers issues left by long-ago foreclosures, survey inconsistencies, more types of easements and liens, breached agency regulations from the past — even certain zoning problems. But it goes further, covering the deed holder in cases of scams, fraud, and post-policy forgery. Encroachments after your purchase may also be covered. Always discuss coverage with the company to understand what’s covered, what’s not, any deductibles, and what endorsements you might need.

A survey can prevent a whole lot of what extended policies cover! Surveys point out  features that may impact your property as described on your deed. But not all physical issues have fixes — especially in this time of climate challenges.

I Heard There are Special Rules in Certain States?

Yes. Some states regulate pricing. Florida, New Mexico, and Texas are examples. Check out the states’ websites to decide whether you need to shop around, even where title insurance costs have caps.

Iowa home buyers receive state protections. For most primary residences, a super-low fee covers complete title research and coverage. And most endorsements are free. Read all about Iowa title protection on the state’s new, dedicated webpage.

Bonus: Iowa uses proceeds to fund initiatives that keep people housed. Nice job, Iowa.

Why Can’t All State Governments Stand Behind Their County Deed Records?

Missing title defects should become a rarity now that counties across the nation are digitizing their records. Computer-based searches easily spot defects. Insurance payouts are rarely necessary.

So, we hear you. Forcing buyers to cover title insurance is seeming more and more like an extra fee — one that governments ought to make obsolete.

And let’s not forget that receiving a warranty deed from the seller means a title company stands behind its integrity. The warranty states that the title is marketable. Contact the title company if you run into claims against the deed. Their staff should be willing to help.

Pro tip: Find out if your seller bought an owner’s title policy. You could be eligible to “substitute” your new policy for the seller — at a discount rate.

Looking Ahead…

Latent defects in deeds are gradually becoming a problem of the past.

To this point, we’ve watched Bergen County, New Jersey migrate hundreds of thousands of deeds onto a blockchain ledger. As this kind of work becomes normal, title defects should diminish. The end of extra fees and premiums for title coverage could happen in the course of digital progress.

For now, though, title insurance can save deeds.