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Title Insurance: Who Pays It and How Does It Work

Are You Responsible For Paying For Title Insurance? 

There is no legal standard of responsibility that determines who pays for owner’s title insurance. Responsibility for payment differs according to the customs in your location or a personal agreement between the buyer and seller.

However, some states or regions have long-standing customs dictating who pays, such as in Illinois and Wisconsin, where that seller traditionally does so. In contrast, the buyer typically pays lenders’ title insurance because lenders typically require that as part of their mortgage terms.

What To Expect When Closing On A House 

Closing on a home involves several expenses. Some of the costs you can expect to pay at closing include appraisal fees, mortgage insurance premiums, attorney fees, mortgage origination fees, and escrow. You may also be required to prepay a portion of your homeowner’s insurance and property taxes.

However, one cost associated with closing may be a little bit more nebulous: title insurance. Title insurance helps protect against third-party claims or issues caused by the actions of a previous owner, designed to strip a homeowner of their title. There are two kinds of title insurance: owner’s and lender’s. Lenders generally require buyers to purchase title insurance for them as part of the loan terms. However, determining who pays for owners’ title insurance will come down to your specific situation.

How Does Title Insurance Work? 

Title insurance helps protect against third-party claims or issues caused by the actions of a previous owner, designed to strip a homeowner of their title. Title insurance most commonly prevents legal weaponization from the following factors:

  • Property survey errors: This might include a fight between the previous owner and their neighbor over land survey results 
  • Boundary disputes: Neighbors also commonly dispute over their property lines 
  • Errors on the property deed: Errors like misspellings or incorrect descriptions of amenities of the property can lead to a defective deed 
  • Building code violations by a previous owner: The previous owner may still owe fines or unpaid stop-build orders for unresolved code violations
  • Conflicting wills: More than one benefactor may have left someone the property in their will
  • Claims by an ex-spouse who didn’t sign off on the sale: A former spouse may be owed alimony or child support before they will sign off on the transfer of the property
  • Forged documents: A forged seller signature can cause the title to be null and void
  • Liens from contractors, taxing entities, or previous lenders: Title insurance enables the lenders to be repaid while relieving the buyer of this financial burden
  • Encroachments: A previous owner may have left an encroachment issue, such as constructing an extension that oversteps their neighbor’s property line, unresolved
  • Improperly recorded documents: This may require the drafting of a correction deed, a legal tool used to officially enter the correct document into the public record

Who Needs Title Insurance? 

Depending on which position you take a real estate deal, title insurance can serve the interest of the owner or the mortgage lender. Owner’s insurance is optional but can protect against any unforeseen financial issues that might affect their purchase of the house. A lender’s policy is typically required as a condition of a mortgage to protect the lender’s bottom line. 

Owner’s Title Insurance 

Owner’s title insurance is not mandatory; however, owners are strongly encouraged to buy it anyway. In some cases, the seller will cover the cost of title insurance for the buyer and this can be asked for in the original purchase contract or during negotiations. Regardless of who pays for title insurance, owners can enjoy protections against the following:

  • Back taxes
  • Forgeries
  • Fraud
  • Liens
  • Conflicting wills
  • Spousal claims
  • Easements
  • Encumbrances

Prospective homeowners should protect themselves from being financially liable for any issues related to the title. For example, buyers shouldn’t have to pay the previous owner’s unpaid liens or back taxes. Owner’s title insurance also protects them from scams such as forgeries that could throw their actual ownership of the home into question.

Lender’s Title Insurance 

Lenders usually require buyers to purchase title insurance as a mortgage loan condition. Essentially, a lender’s title insurance policy ensures that that lender will recoup the cost of the house even if an issue arises during the title search at closing. 

Lenders rely on the house’s value as collateral to secure mortgage loans made to buyers. Title insurance benefits lenders either way: a clean title does not infringe on the owner’s ability to make monthly mortgage payments, and the title company must pay any outstanding balances since the title company must verify the seller has the right to sell the property.

What Does Title Insurance Cover? 

Title insurance coverage differs depending on whether you are a buyer or a lender. A title insurance policy includes different benefits for each of the parties involved.

Owner’s Title Insurance 

Title insurance is purchased only once and lasts as long as that buyer owns the home. Owner’s title insurance costs are based on the home’s purchase price, typically accounting for between .5% and 1% of the total home cost. 

Title insurance enables homeowners to work with a title company to resolve “clouds” or issues that may arise during the title search instead of automatically seeking legal action. Title insurance defends owners against any issues occurring before they buy the home and compensates them for any financial obligations therein.

Lender’s Title Insurance 

Lenders must ensure they are paid any outstanding liens or debts owed on a property. Any challenge to a homeowner’s property title by a third party can delay or diminish the lender’s chances of recouping their loan. Lender’s title insurance ensures lenders are repaid, either by the buyer or title company, should a title search uncover any old debts.

Title searches may include boundary or survey disputes, liens on the property for unpaid alimony or child support, or conflicting wills dictating property ownership. Lender’s title insurance protects a lender’s right to seek repayment of any outstanding debts, either from the new buyer or, if the buyer is covered by their own title insurance, the title company.  

What Does Title Insurance Not Cover? 

Unlike other types of insurance, title insurance protects owners and lenders against past issues that have already occurred rather than potential future risks. Coverage includes disputes, claims, or forced sales that occur before closing but are unknown to the parties involved in the transaction before a thorough title search. 

Title insurance does not cover the homeowners’ actions after purchasing the house, such as failure to pay property taxes or refusal to pay contractors for services rendered. Additionally, title insurance does not protect homeowners against government seizures under eminent domain laws. It also doesn’t cover issues that may happen to the home, like hail or fire damage, which is typically covered through a regular homeowners insurance policy.

When Does a Title Search Occur Within The Closing Process? 

A title search is performed at a critical time during the closing process; once a buyer has officially made an offer on a home, and the seller has accepted it. Before the buyers can claim ownership, a title search must be run on the property. Lenders typically require a title search at this particular juncture to approve a mortgage loan.

A title search is meant to find and resolve any issues caused by previous owners that may affect the current pending sale of the house; however, title searches are not perfect and may not uncover everything. Old liens and debts commonly come up in title searches but other issues like mental illness affecting the owner’s documentation or repeated clerical errors may be harder to pin down.

How Do You Determine Who Pays For Title Insurance? 

For an owner’s policy, determining who pays for title insurance comes down to the agreement between the parties. Since owner’s title insurance is not mandatory, there are no rules governing who pays for it, though sellers often will. Buyers generally pay for lender’s title insurance since most lenders require it as a condition of their loan.

Owner’s Title Insurance 

Deciding who will pay the owner’s insurance may depend on whoever is more motivated to finalize the transaction. Sellers may offer it to sweeten the deal, but if not, buyers can take the initiative.

When The Seller Pays 

More often than not, the seller will pay for the title insurance. While there are no set precedents or legal requirements, sellers customarily pay for the buyer’s title insurance in states, including Wisconsin and Illinois, as an aboveboard gesture. Other states may preserve their customs of sellers or buyers purchasing a policy or splitting the cost.

Some of the most common reasons sellers pay for title insurance include the following:

  • Local customs: Some states unofficially carry on this real-estate-related custom
  • Removing barriers: Sellers often prefer to streamline the process of making the sale 
  • As a show of good faith: Sellers can emphasize their willingness to make an honest deal
  • To protect the buyer’s equity: Buyers will not lose their right to ownership from title issues 
  • They are unsure if an additional party has a claim to the property: Sellers may front the cost just in case the title search turns up issues they are unaware of
  • To protect themselves from legal action: The title company can help resolve any issues that may arise instead of the seller taking sole responsibility for previous claims.

When The Buyer Pays 

While slightly less common, it is not unusual for a buyer to pay for their own title insurance. In some locations and circumstances, it is customary for the buyer to purchase the owner’s policy. 

The following are among the most common reasons for buyers to front the cost: 

  • It is customary in their location: This varies by region; for example, typically, buyers pay for title insurance in Northern California, and sellers pay in Southern California.
  • They are buying in a competitive housing market: This depends on how desirable the listing is and whether the market currently favors buyers or sellers. 
  • The buyer is purchasing a home from an individual seller who does not have a clear title: Sellers may indicate previous property claims or debts and advise buyers to purchase a title policy. 
  • The buyer is purchasing a home from a bank or other lender that previously foreclosed on the property: Since there is no individual seller involved in this deal and there are likely previous issues that could affect the sale of the home, buyers should purchase their own policy.

What Happens If The Buyer and Seller Cannot Agree? 

Since owner’s title policies are not mandatory, disagreements may arise over who pays for title insurance. In locations where customs are in place, buyers and sellers typically honor these traditions; however, in other cases, buyers may need to negotiate the purchase terms.

Buyers who cannot resolve their dispute through negotiation could end up not purchasing a policy or forfeiting the home purchase altogether. Title companies sometimes offer recommendations for services such as a closing lawyer or mediation session to help resolve the conflict.

Lender’s Title Insurance 

Generally, lender’s title insurance is paid for by the buyer. While owner’s title insurance is optional, lenders require their title insurance to be paid for by the owner to fund the owner’s mortgage loan. This scenario is typical of a transaction between a mortgagee and mortgagor but is not necessary in a real estate deal for which the buyer does not require a loan. 

How Much Does Title Insurance Cost? 

The cost of a lender’s title insurance policy is based on the total loan amount, while the cost of an owner’s policy depends on the house’s sale price. Some states set the owner’s title insurance price at a fixed amount.

Owner’s Title Insurance 

Various factors determine how much an owner’s title insurance policy may cost. 

  • The state they live in
  • The sale value of their house
  • Whether they purchase owner’s and lender’s insurance together from the same title company

Owners can expect the price of their title insurance to cost less than 1% of the home’s value, typically. Title insurance is a one-time premium paid at the closing of the escrow that lasts the entire time one owns a home.

Lender’s Title Insurance 

Similar factors affect the cost of lender’s insurance, which is required by most mortgage lenders: 

  • The total amount of the mortgage/loan
  • The location of the property
  • Whether the state maintains a fixed price for lender’s title insurance 

Lenders commonly require title insurance, usually paid for by owners through escrow. The good news is you are allowed to shop around for your provider. Some states set flat rates, ranging from $500-$1,000, for lender’s title insurance, while others enable title companies to charge up to 1% of the price of the loan. Many title companies offer discounts for buying owner’s and lender’s policies together. Lender coverage declines as the owner pays their mortgage and ends when the house is paid off.

Should You Get Title Insurance? 

Owner’s title insurance is a wise financial move unless you are prepared to potentially lose the chance to buy your home in a “worst case” scenario. Lender’s title insurance is required for borrowers applying for a mortgage loan.

Owner’s Title Insurance 

As is the nature of any insurance, a buyer may not need to actually utilize the coverage a title policy provides. More than likely, however, they will need protection against any unforeseen conflicts that could ultimately ruin their plans to buy a home. The following are just some of the benefits of buying owner’s title insurance:

  • Protection against past third-party claims on your house
  • Legal representation against financial liability due to the actions of past owners
  • Protection from being held liable by the lender for unpaid liens and debts on the property as a result of the actions of past owners
  • Coverage for clouds that may arise at a later date from additional title searches

Realtors and title companies always recommend owner’s title insurance for protection and peace of mind.

Lender’s Title Insurance 

The primary reason most people buy lender’s title insurance is that they have to. Mortgage lenders commonly require the prospective owner of the home to pay for the lender’s coverage as a condition of issuing a home loan. The only time an owner would be off the hook for lender’s title insurance is if the owner does not need to take out a mortgage or loan to buy the home.

How To Get Title Insurance 

The cost of lender’s title insurance is usually deducted from the owner’s escrow account. Whether you purchase owner’s title insurance as a buyer or seller, it will often follow this pattern:

1. Research Insurers 

You might start researching title companies by requesting recommendations from your realtor or mortgage lender. Many lenders will choose a company for you when preparing your loan, so be aware you have the right to shop around. Since title insurance protects against past issues instead of future risks, you should seek out a legitimate title company with experience in the closing process.   

Reading reviews, performing online searches and research, and speaking with title company officers or lawyers can help you narrow down your list. You can also check to ensure a title company is licensed and approved by its local state insurance department or regulatory board.

2. Review Quotes 

Quotes for title insurance should generally not exceed 1% of the total home value. Title companies located in states that mandate universal owner’s title policy rates cannot raise their rates at their own discretion. 

The insurer should remind you this is a one-time payment usually accounted for among itemized closing costs. Always weigh the quality of coverage against the policy’s price to ensure you receive the protection you need.

3. Determine Which Insurer is Right For You 

You should always choose your own title company based on quality, experience, and client care. They should also be willing to work with you to discuss options and guide you through the final leg of the home buying process. 

While you may not want to buy a policy from the same title company the current owner used, some insurers offer discounts for buying new owners’ and lenders’ policies together. Insurers can also explain if your state dictates its own fixed rates for owner’s title insurance.

4. Make Your First Payment 

Unlike other types of insurance characterized by monthly premium payments, title insurance requires a one-time payment for the duration of your home ownership. Once you purchase a policy, it takes roughly two weeks to insure the title and finalize the transaction. 

The owner’s title insurance cost customarily comes from the owner’s escrow. Since title companies are experienced in arranging all of the necessary steps toward closing the deal, clients can feel confident the insurer will work to streamline the approval of the title insurance.

Alternatives to Title Insurance 

Some companies offer attorney opinion letters (AOLs) instead of a traditional title insurance policy, touting the product’s low price and wide acceptance rate in all 50 states. While Fannie Mae, Freddie Mac, and VA lenders will accept AOLs, other organizations, like the American Land Title Association and the Federal Housing Financing Agency, will not, as they may only offer limited coverage.

Only a title insurance policy can offer full protection for aspiring homeowners at closing. Most lenders also still require buyers to purchase a title policy to protect the lender against any past conflicts over the property title. 

Wrapping Up 

In conclusion, determining who should pay for title insurance when closing on a home can depend on various factors, including local customs and state laws. It is crucial for homebuyers to understand the details of their purchase agreement and to work closely with their real estate agent or attorney to determine who is responsible for paying for title insurance.

In any case, title insurance is an essential component of the home buying process that provides peace of mind to both buyers and lenders. Therefore, while it may seem like an additional expense, title insurance is a wise investment that can save both time and money in the long run.