What Is Title Insurance? Coverage In the Event of Hidden Claims
- Published on
- 12 min read
-
Jenn Andrlik, Contributing AuthorClose
Jenn Andrlik Contributing AuthorJenn Andrlik has been a journalist for over 20+ years working for such magazines and websites as BHG, House Beautiful, Elle Decor, Martha Stewart, and leading the local magazine Westchester Home for the past six years. She is highly knowledgeable about interior design, architecture, and real estate businesses.
-
Sam Dadofalza, Associate EditorClose
Sam Dadofalza Associate Editor
Sam Dadofalza is an associate editor at HomeLight, where she crafts insightful stories to guide homebuyers and sellers through the intricacies of real estate transactions. She has previously contributed to digital marketing firms and online business publications, honing her skills in creating engaging and informative content.
There’s a moment in nearly every home sale when the excitement of an accepted offer shifts into piles of paperwork and last-minute questions you didn’t expect. Underneath all of it is the home’s title, the legal right that confirms you can transfer ownership to someone else. Most sellers don’t think about it until someone starts asking for more documents than expected. Somewhere in the middle of the organized chaos, you find yourself asking, “What is title insurance?”
It sounds technical, almost optional, but it’s treated like a standard part of getting to closing. In this article, we walk you through everything you need to know about title insurance with help from top New Jersey real estate agent Adam D’Annunzio, who sells 68% more single-family homes than the average Ocean City agent.
Find an Agent to Help You Navigate the Paperwork
Selling real estate is a complex task. A top real estate agent can serve as an invaluable transaction coordinator during steps like the title search and deed transfer.
What is title insurance?
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.
What are the types of title insurance?
As closing gets closer, sellers start hearing more detailed terms about how ownership is protected and verified. Title insurance isn’t a single blanket policy, as it comes in different forms tied to different roles in the transaction. Here are the different types of title insurance.
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 affect the title.
- The owner discovers “restrictive covenants,” terms that reduce the value or enjoyment of the property. These include unrecorded easements, which are rights allowing others to use a portion of the property for a specific purpose, like access or utilities, even though they don’t own it.
- Encumbrances or judgments against property, such as outstanding lawsuits and liens, come to light after the title transfer.
According to Fidelity National Title Insurance Company, 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 (negotiable by contract, but usually the seller pays)
- Florida (usually the seller pays, but the buyer pays in some counties)
- Hawaii (typically, the seller pays for 60% of the policy)
- Idaho
- Illinois
- Indiana
- Kansas (usually the seller pays, but varies by location and contract)
- Michigan
- Missouri (usually the seller pays, but varies by location and contract)
- Montana
- Nebraska (typically, the seller pays for 50% of the policy)
- Nevada
- Oregon (seller pays for standard coverage, while the buyer pays the endorsements and extended coverage)
- South Dakota (the seller pays for 50% of the policy)
- Texas
- Utah (negotiable, but usually the seller pays)
- Washington (seller pays for standard coverage, while the buyer pays the endorsements and extended coverage)
- Wisconsin
- Wyoming
Additionally, it’s customary for sellers and buyers to negotiate who covers the owner’s policy in these states:
- California
- District of Columbia
- Georgia
- Iowa
- Kentucky
- Minnesota
- Mississippi
- New Mexico
- Ohio (usually divided equally)
- 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:
- Colorado (negotiable by contract)
- Louisiana
- Nebraska (divided equally)
- Utah (buyer typically pays, but negotiable by contract)
- Virginia
- Wisconsin (buyer usually pays, but the seller provides a gap endorsement)
How much does title insurance cost?
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, depending on location and coverage details. In general, title insurance for a $300,000 home may range between $1,500 and $3,000.
Of course, title insurance costs can vary depending on where you’re buying. In some states, there are even laws that set or standardize how much you’ll pay.
“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.”
»Learn more: Title insurance is just one of the many closing costs that can impact your final bottom line when selling a home. Use a Seller Closing Cost Calculator to get a clearer picture of what you’ll actually walk away with so there are no surprises at closing.
When does title insurance kick 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 basically when a creditor puts a legal claim on someone’s home because they’re owed money, giving them a way to get paid back. If a lien shows up after the property has already been transferred, title insurance can help protect the buyer from that issue.
“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, including contractors, architects, and builders
- 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
An encroachment creates a property dispute
Encroachment happens when part of a structure or improvement on a property extends onto a neighboring property, often without anyone realizing it at first. These issues can go unnoticed for years, especially if fences, driveways, or additions were built based on outdated or inaccurate boundaries.
Title insurance can step in if a previously unidentified encroachment issue is discovered after the property has changed hands. In this scenario, neighbors may suddenly dispute which portion of the land legally belongs to each party. When that happens, title insurance can help cover the legal costs of resolving the boundary disagreement.
A long-lost heir claims they own the property
Title insurance can come into play when ownership of a property is suddenly challenged by someone with a potential legal claim. In rare cases, a long-lost heir may surface and assert that they actually have rights to the home’s title.
This can happen during or even after a home sale, especially if past ownership records were incomplete or disputed. When this occurs, title insurance can help cover the legal defense and any costs needed to resolve the claim.
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.
Close Faster, Stress Less Today
Closing in a traditional home sale can get complicated quickly, with paperwork, negotiations, and last-minute changes all hitting at the same time. If you’d rather skip the back-and-forth, HomeLight’s Simple Sale lets you request an instant offer and move toward closing with less stress and fewer surprises.
Key takeaways
- As the seller, you may end up paying for your buyer’s title insurance.
- Customs for who pays for the owner’s policy and lender’s policy vary from 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.
Title insurance may not be the most visible part of a home sale, but it plays an important role in keeping ownership transfers clean and protected. From hidden liens to boundary issues or unexpected claims, it helps address problems that might otherwise surface after closing.
For sellers, understanding how it works can make the closing process feel a little more predictable and less overwhelming. You don’t have to navigate the tricky parts of the sale alone. Partner with a real estate agent who can guide you through each step with clarity and confidence.
Frequently asked questions (FAQs) about title insurance
Title insurance usually isn’t legally required, but most lenders will make you get a lender’s policy if you’re taking out a mortgage. The owner’s policy is optional, but a lot of buyers (and sellers in some cases) still choose it for protection. It really depends on the transaction and local practices.
Yes, title insurance is usually paid once at closing instead of monthly or yearly. After that, you don’t keep paying for it like other types of insurance. It’s a single upfront cost for long-term coverage.
Title insurance typically lasts as long as you or your heirs have an interest in the property. That means the coverage stays in place for as long as you own the home. It’s basically a one-time protection that doesn’t expire.
In most cases, you’ll need a new lender’s title insurance policy when you refinance. The lender wants to make sure there aren’t any new title issues since your last loan. So even if you had coverage before, refinancing usually triggers a fresh policy.
No, they cover totally different things. Title insurance protects against ownership and legal issues tied to the property’s title. Homeowners insurance protects the physical house from damage, theft, or disasters.
Header Image Source: (Yuriy K / Shutterstock)
At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.
