What Is Title Insurance? Coverage In the Event of Hidden Claims

Your buyer is asking you to pay for their title insurance, but this policy protects them, not you — so what gives?

In some states, it’s customary for sellers to pay for their buyer’s title insurance at closing. And even if it’s not in yours, your buyer may negotiate for you to cover the cost as a concession to sweeten the deal.

We’ll walk you through everything you need to know about title insurance with help from top real estate agent Adam D’Annunzio, who completes 22% more sales than the average agent in Ocean City, New Jersey.

Title insurance protects the buyer and their lender from title issues

When you sell your house, you must complete a title search to identify all legal claims to the property’s title. As the seller, you must resolve all liens found in the title search in order to transfer the title to the buyer. The title search may reveal 30 to 50 years’ worth of the property’s history and should uncover any mortgage liens, rightful heirs, filing errors, current deed holders, deed restrictions, or forgeries to name a few. 

The keyword here is “should” because title searches are not 100% foolproof. Even the most skilled title professionals may not uncover title issues due to filing errors, forgeries, or undisclosed heirs. That’s where title insurance comes in. The title insurance policy protects the buyer and their lender from any title issues discovered after the title transfer.

As the seller, you may pay for the buyer’s title insurance

There are two types of title insurance: the owner’s policy protects the buyer, and the lender’s policy protects the lender. Typically, if the seller pays for title insurance, they pay for the owner’s policy, although there may be cases where the buyer negotiates for the seller to cover both.

Owner’s policy

The owner’s policy protects the buyer if someone makes a claim against the home after they purchase it. The coverage amount is usually equal to the purchase price and lasts for the duration of ownership.

Here are some examples of title issues that may prompt the owner’s policy to kick in:

  • Another party claims rightful ownership of the property.
  • Title documents have incorrect or forged signatures.
  • Title records contain errors that impact the title.
  • The owner discovers “restrictive covenants” — terms that reduce value or enjoyment of the property — such as unrecorded easements.
  • Encumbrances or judgments against property (such as outstanding lawsuits and liens) come to light after the title transfer.

According to Republic Title, it’s customary for sellers to pay for the owner’s policy in the following states:

  • Alabama (negotiable, but usually the seller pays)
  • Alaska (negotiable, but usually the seller pays)
  • Arizona
  • Arkansas
  • Colorado
  • Hawaii (typically, the seller pays for 60% of the policy)
  • Idaho
  • Illinois (negotiable, but usually the seller pays)
  • Indiana (negotiable, but usually the seller pays)
  • Michigan
  • Montana
  • Nebraska (typically, the seller pays for 50% of the policy)
  • Nevada
  • Oregon
  • Texas
  • Utah (negotiable, but usually the seller pays)
  • Washington
  • Wisconsin
  • Wyoming (negotiable, but usually the seller pays)

Additionally, it’s customary for sellers and buyers to negotiate who covers the owner’s policy in these states:

  • California
  • District of Columbia
  • Florida
  • Georgia
  • Iowa
  • Kansas
  • Kentucky
  • Mississippi
  • Missouri
  • Ohio
  • Oklahoma
  • Tennessee
  • Virginia

Lender’s policy

It’s rare for sellers to pay for the lender’s policy, also known as a loan policy; in most cases, the buyer pays for this cost. This policy protects the mortgage company from losses related to title issues. The lender’s policy typically insures the amount of the loan.

“Most people believe that the buyer is the one buying the house,” when in reality it’s the mortgage company that’s putting up most of the money, D’Annunzio explains. “So the mortgage company wants to be covered.”

As the seller, there’s a higher chance your buyer may negotiate for you to pay for the lender’s policy in the following states:

  • District of Columbia
  • Idaho
  • Indiana
  • Louisiana
  • Maryland
  • Mississippi
  • Montana
  • Oklahoma
  • Virginia
  • West Virginia
  • Wyoming
A person calculating the cost of title insurance.
Source: (Jakob Owens / Unsplash)

Title insurance costs

According to the American Land Title Association (ALTA), a large national trade group of title agents, the cost of the owner’s policy is based on the home’s purchase price, while a lender’s policy is based on the loan amount. Altogether, title insurance usually costs about 0.5% to 1.0% of the purchase price. For example, title insurance for a $300,000 home may range between $1,500 to $3,000.

Of course, the cost of title insurance varies by location. Some states even impose laws that standardize the title insurance costs.

“In New Jersey, the cost of the insurance is regulated and predetermined by the state,” D’Annunzio explains. “So it doesn’t matter what insurance company you go to — it’s really just customer service that you’re shopping for.”

Circumstances where title insurance kicks in

As the seller, you don’t need to worry about title insurance once you’ve footed the bill. But just in case we’ve piqued your interest, here’s some additional context on when title insurance comes into play:

A lien was put on the property

A property lien is a legal claim against your property by a creditor that enables them to collect a debt they’re owed. Title insurance protects buyers if a lien is discovered after the title is transferred.

“If a contractor was not paid many years ago, a utility wasn’t paid, or there is an estate situation where the property was transferred but long lost, a lien can be put on the property,” explains D’Annunzio.

Types of liens include:

  • Mortgage lien: a voluntary lien the homeowner puts on their home to borrow against it
  • Tax lien: a lien from the owner failing to pay their property taxes
  • Mechanics lien: a lien incurred for not paying a party who worked on the property (contractors, architects, builder, etc)
  • IRS lien: a lien imposed by the IRS when a property owner fails to pay their income taxes
  • Judgment lien: a lien incurred if the owner loses a lawsuit and fails to pay what is owed
  • Child support lien: a lien placed on the property if the owner fails to pay court-ordered child support
A house that will need title insurance.
Source: (Roger Starnes Sr / Unsplash)

Encroachment

Title insurance kicks in if there is a previously unidentified encroachment issue. In this scenario, there may be a dispute between neighbors on who part of the land belongs to.

A long-lost heir claims they own the property

Title insurance comes into play if a relative or heir comes out of the woodwork and claims they own the title to the property during or after the home sale.

Paperwork was misfiled or lost

Misfiled paperwork or missing filings happen more often than you may think. “This is the biggest issue we see happen almost every week,” says D’Annunzio. “The seller may have paid off a previous loan or mortgage, but the company never recorded that letter of satisfaction with the county clerk or the county courthouse.” In this case, it will show up in the title company’s search, but these situations can typically be resolved easily.

Key takeaways

  • As the seller, you may end up paying for your buyer’s title insurance.
  • Customs for who pays for the title insurance (owner’s policy and lender’s policy) vary state to state.
  • Title insurance costs 0.5% to 1% of the purchase price on average.
  • Some states have laws that regulate the cost of title insurance.

Header Image Source: (Yuriy K / Shutterstock)