Who Pays for the Title Insurance?
Feb 24, 2023
Closing on a house comes with closing costs.
These can include a number of different charges for both the new homebuyer and also the seller. When it comes to title insurance, new homebuyers should explore 1) what title insurance is; 2) what it covers; and 3) who pays for it.
What Is Title Insurance?
Title insurance protects homebuyers from title defects or title flaws originating from a previous owner. It also protects against someone contesting the new buyer's legitimacy as a homeowner and their claim on the land. There are actually two title insurance policies, one for the buyer and one for the lender. The latter also needs protection as they're providing the mortgage to purchase the home.
Let's quickly look at two examples of when a title policy would be extremely important.
Say you purchase a home, move in, and then four months later discover that the former owner's ex-wife claims she was also on the mortgage but was never consulted about the sale. The courts could decide that she's right and the sale could be disputed or even reversed.
Or, long after you've purchased your house, your neighbors could dispute the boundary line, arguing that part of your property is actually theirs. Without title insurance that proves otherwise, they could launch a successful case to that effect.
This is why, when you close on a property, a thorough title search is done. This process is referred to as the "abstract of title" or "chain of title". Obtaining title insurance goes a step further to ensure that nothing was missed during the title search.
The Two Types of Title Insurance Policies
The two types are 1) Lender's title insurance policy and 2) Owner's title insurance policy
The mortgage lender requires the homebuyer to pay for lender’s title insurance coverage when purchasing a home via a mortgage. If you buy a property with cash, a lender policy is not required since there is not bank involved.
With a Lender's policy, the mortgage company is protected against potential losses equivalent to the total loan value. Owner’s title insurance is optional and is paid as a one-time fee at closing.
Do You Need Title Insurance?
Title insurance may seem like a no-brainer. If nothing else, it's an investment in peace-of-mind, just like other forms of insurance.
However, the truth is that title insurance is not always required if you're the buyer.
As we mentioned above, there are two types of title insurance: lender's title insurance and owner's title insurance. If you are taking out a loan to purchase your home, then your mortgage lender will require lender's title insurance to protect their interests. However, an owner's title policy will likely be optional, so you could proceed with purchasing a home without paying to insure your claim on the title.
That being said, unless you're purchasing a new construction home – which means no one held title prior - foregoing the insurance is could be risky. If someone is able to contest your legitimacy as the owner, you could face an expensive legal battle or even lose the house.
Who Has to Pay for the Title Insurance?
The actual law that decides who has to pay the title insurance cost differs from state-to-state and can even change from one county to another.
For lender's title insurance (or lender's policy), this cost typically falls on the buyer since he or she is the one taking out a loan with the mortgage lender.
As for the owner's policy, this cost is optional and up for negotiation in regards to who pays. In some instances, the seller could pay for this policy as a means to sweeten the deal on their home and ensure clear title.
To be prepared, it is best to check with your local laws before volunteering to cover those costs.
Who Selects the Title Company?
Just like is often the case with who pays for it, who chooses the title company is also up for negotiation.
Keep in mind that, if you're paying for one of the policies, no one else can dictate which title company you use for it. Also, it's important to make the distinction that title insurance companies, which cover any claims and losses are different than a closing attorney or a title company - who handles the home closing.
Furthermore, it's never a good idea for the buyer to go to the same title insurance company that the seller used back when they purchased the property. It's unlikely the same company will find anything different, which could be a big problem later on.
Better to let another insurer take a shot at digging up any issues.
Is the Price of Title Insurance Regulated?
This is another aspect of title insurance that depends on the state. Fortunately, you only need to reference your state's Department of Insurance for information about any regulations that may apply to the cost of title insurance.
No matter what the regulations say in your state, the cost of title insurance will be a percentage of the home's price. For most houses, then, this will work out to be somewhere between $1,200 and $2,500 for the title insurance premiums. You can usually save money if you buy both policies from the same company, too.
How Much Does the Policy Have to Cover?
Finally, how much coverage you receive from a title insurance policy will depend on how much you want to spend. This is why buyers need to be careful about letting the seller handle this step. It might sound great to dodge the cost, but it could come at the price of a lackluster policy. So, buyers would be wise to stipulate what the insurance has to cover.
A policy may protect against any combination of the following:
- Back Taxes
- Conflicting wills
- Filing Errors
- Liens from HELOCs, unpaid contractor bills, or other companies
- Spousal claims
- Title forgeries
- Undocumented easements
- Unknown heirs who claim ownership of the estate
Again, similar to other types of insurance, you could choose to augment the standard version based on your unique needs. Maybe you're planning to build on your new property, so you want to pay for extra protection in case your construction accidentally violates your new subdivision's restrictions.
You'll also need to hear what your lender has to say about their title insurance policy. For example, if you went with an adjustable-rate mortgage (ARM), they may require an endorsement on the policy that stipulates they'd be first in line to get repaid if you went into foreclosure.
In short, buyers have a lot of options for the kind of coverage they want in their title insurance policies. It just depends on their specific needs and how much they're willing to pay.
Get Your Closing Costs Paid for with SimpleShowing
As you can see, there's still a lot that goes into deciding what type of title insurance policy you should secure if you're the buyer and who will pay for it. While it's just one of potentially many closing costs you have to consider, the policy itself could make all the difference down the road, but the price is also important.
So, it's worth taking your time when it comes to deciding what policy you'd like to move forward.
When it comes to who is going to pay for the title insurance policy and your closing costs in general, it is best to work with an experienced real estate agent who can negotiate these expenses for you. Title insurance costs can add up and when that cost is added to prorated property taxes and other closing costs. That's where our closing cost credit comes in handy.
When you buy with a SimpleShowing Agent, your agent will not only negotiate these costs for you, but will also give you an average $5,000 refund that you can put towards your closings costs or take as a check at closing.
Contact us today and we'll walk you through our simple process.