Do I Really Need Title Insurance for My Home?
Title insurance protects both home buyers and lenders from defects on a property’s title -- but do you really need it? Let’s talk about defects first, since that’s the heart of the matter.
A title defect means that there’s something inherently wrong with the chain of title (the historical transfers of the property, all the way back to when the property was first purchased from the United States government, in theory).
If you need a better way to think about this, understand that there used to be a booklet of sorts that buyers would get at closing that contained information on every owner and every sale of the property.
It was arranged in chronological order, so as you flipped through, you’d see back through time -- who bought your house in 1922, who sold that owner the land, who originally split the land into lots, and so forth. When a new buyer came along, they added a few pages to the front of the book and you took it with you and put it in a safe place until it became your turn to sell. They’re really pretty neat if you can get your hands on one.
So, you have all this rich and detailed ownership history on each and every property that has a legal description in the United States. It doesn’t matter if it’s in a subdivision or out in the boonies, each property has some kind of chain of title. What a buyer used to get was just an abstract, not the entire thing -- the entire chain of title is filed with local courthouses and available through special databases that title companies buy to use in their research.
Common Issues with the Chain of Title
Sometimes, there are issues with the chain of title. An example might be that the former owner who sold the property to a buyer did so without telling their estranged spouse, but because they’d been estranged a while, no one realized there was a problem. That spouse might still have a claim to the property, especially because they had no say in the transaction and got no compensation.
More often, this happens when someone with a lot of children dies. Their ten kids can’t agree on whether to sell mom’s house or for how much, and eventually someone just makes a decision. The buyer doesn’t know any of this is going on, of course. And the sellers, for their part, don’t realize that they were making a mistake in bypassing their siblings (who are joint owners).
In both cases, you have a potential claim to ownership. This is what they call a cloudy title. This is a title that no bank in their right mind will make a loan on. Easements and things like that can also cause title problems, but we'll get into that in a minute.
Let's say that you’re buying a house and the title company discovers a cloud on the title. This is where the seller's title insurance would come into the picture. The title insurance company is charged with figuring out how to clear the defect on the title.
Usually, it’s something as simple as having the estranged wife or the unwilling seller sibling sign their rights to any ownership away with an instrument like a Quit Claim deed. It just basically says “Hey, I don’t claim to own this thing anymore. You’re gold.” And then the sale can move forward.
There are other things a title insurance policy can do, too. For example, a Texas homeowner we know owned a small construction company that specialized in infill construction (they tore down crumbling houses and replaced them with new ones in urban neighborhoods). Often, it would be discovered that the lots meant for new construction had part of a garage on them or a fence in the wrong place -- and a construction loan wouldn’t be possible until that was cleared up. In these situations, the title insurance company had to work a little harder to get that Quit Claim deed. They’d negotiate with the owner that was overlapping, sometimes paying fair market value for the contested part of the property. They did whatever was necessary to clear the title in many cases.
Title Insurance: A Win-Win for Buyers, Sellers, and Lenders
This entire diatribe should make it clear why title insurance is vital, but in case it didn’t, the bottom line on title insurance is that it protects both buyer and lender from someone appearing out of nowhere and demanding more money, slapping a lien against the property or seeking actual possession through legal or non-legal channels.
By doing the title research and clearing any potential clouds from it, the bank also knows they won’t have to fight with someone unexpected if they were to foreclose and sell the property. The buyer knows that they won’t have some stranger randomly show up with a moving truck and take over their living room.
As for costs, those will vary widely depending on the price of the property and its location. First American Title has a good calculator that helps fill in those blanks, but we’ll give you a quick couple of examples.
If you’re buying title insurance in Tarrant County, Texas (this is the Dallas-Fort Worth Metroplex), a policy on a $350,000 home purchase will cost the buyer $2,260 for the buyer’s side; the lender’s side will cost $100. Another house in the same part of Fort Worth that sold for $215,000 would have $1,512 in charges for the owner’s policy; the lender’s side is still $100.
Now, let’s compare that to a $215,000 sale in, say, Oklahoma City, Oklahoma. There, a $215,000 policy for a homebuyer is $810 and $50 for the lender.
Of course, the best possible way to determine how much you'll pay in title insurance is to talk to a real estate professional. We at home.loans are always ready to lend an ear, and our advice, when applicable.