When Do You Need Title Insurance?

Use these links to jump to different sections:

• What Is Title Insurance?
• The Benefits of Having Title Insurance
• Am I Required to Get Title Insurance?
• Title Insurance Cost and Policy Coverage
• Find Experienced Legal Help

For the majority of people, buying a home is the single most important investment they will ever make—and the same is true for businesses looking for commercial space. With so much on the line, real estate investors must protect themselves against common risks. One of the most important forms of protection is title insurance. Should you get it?

While some may say it depends on your circumstances, others, like real estate attorney Brett M. Woodburn, say it’s a must. “Title insurance is critical to a real estate deal, in my opinion. “But most people don’t know how important it is.”

What Is Title Insurance?

Title insurance gives protection to homeowners—and mortgage lenders—if someone else makes a claim on their property.

When you purchase a home or any other type of real estate, you will receive the deed to the property when the transaction is finalized. In the deed, the previous owner will state that they have transferred the title (ownership) of the property to you. Title insurance protects home buyers against any claims that have been filed against the property itself (against the title). Title insurance allows you to ensure that you get that title free and clear of any potential issues.

“Title insurance, unlike other types of insurance, is backward-looking. We look from the date of closing backwards to see what the exposure is. If we find something in the record, we get it cleared up,” Woodburn says, citing items like easements and covenants. “There’s no coverage for that, and you know it’s a risk when you buy. The insurance is there for things that aren’t found—that you simply miss—or there’s fraud or an error in the chain of title. A lot of different things can come up.”

How prevalent are those issues? Woodburn puts it this way: “There are attorneys in Pennsylvania who make a very good living defending title claims on behalf of the insurance companies. The national average is 7 percent of all closings end up having a claim.”

The Benefits of Having Title Insurance

Consider the following scenario: You just purchased a new house. Two months after you move in, you find out that there is a lien on the property. Without a title search, you never knew about this issue previously. A financial institution claims they have a right to your property or that you must make a large payment to resolve the issue. In this situation, title insurance would protect you—no matter the underlying validity of the claim being raised against your property, you will be insured.

As another example, a contractor may file a lawsuit against your property, claiming they were never paid for work that was completed before you obtained ownership. Once again, in this scenario, title insurance would offer full protection against their claim. Your title insurance policy will cover any potential claims being brought against the property, including a title failure.

Am I Required to Get Title Insurance?

In most cases, mortgage lenders require borrowers to obtain a title insurance policy. “The lender will require title insurance for the amount of the loan,” Woodburn says. “But a lender’s policy is a declining policy. So if you have a mortgage for $200,000, and in seven or eight years, you’ve paid it down to $125,000, your title insurance is worth $125,000 now, not $200,000. It only covers the lender’s exposure.”

A lender’s policy is something property buyers get as a matter of course, Woodburn adds, but not every lender or title company will advise them about another protection that he recommends: An owner’s policy. Each state differs in how these work, he says, but “in Pennsylvania, it’s called a differential premium. So if you borrow $200,000 but the house is $250,000, the premium for the lender’s policy is, say, $1,000, and the owner’s policy is maybe $1,200. You’re not paying $2,200; you’re paying $1,200 for both policies. The extra premium is the differential between the owner’s policy and lender’s policy.”

Title Insurance Cost and Policy Coverage

The amount and scope of your insurance is an important aspect to consider, Woodburn says, and it’s worth asking a reputable attorney or title agent for their advice. There are relatively few situations in which it would not be advisable to purchase title insurance. It can be obtained at a relatively small cost considering the protection that it provides.

“You pay for it to protect against the unknown. That’s why you get insurance,” Woodburn says. “These are emotional purchases, and perhaps with the exception of kids, it’s one of if not the most financially and emotionally expensive investments you’re going to make.”

Find Experienced Legal Help

Visit the Super Lawyers directory to find an experienced real estate attorney or law firm in your area. To learn more about this area of law, see our overview of residential real estate transactions.