What is title insurance? You see it as a fee showing up on your loan estimates/closing disclosures, but don’t know why it's there and if it’s necessary. Let’s start with the definition: title insurance protects the homeowners and lenders from any financial loss related to the ownership of the property dependent upon what policies are in place. There are two types of policies: the lender’s policy, which is always required, and an owner’s policy, which is optional. Both types of policies are a one-time, upfront cost.

When you are purchasing a home, a title company checks the ownership history of the property. The title company will check to make sure there are no claims against the property, such as a lien or levy from a lender, back taxes owed to the government, or a lien from a creditor (such as a mechanic’s lien). The title company is looking for a “clear title,” which means the current owner (the person selling the home) has a complete ownership stake in the property without any claims on it.

Now, why do lenders require title insurance? If you think about it, the lender is the one on the hook for the value of the home. And unfortunately, it is possible for a clean title to have an undiscovered issue that could cloud the ownership of the property years after purchase. There could be an oversight made by the title researcher, a previously unknown heir, or even a mistake in the ownership history. There could also be an unknown pending lawsuit or legal judgment. Lenders are going to protect their interest in the loan.

Now you pose the question: Do I need an owner’s title policy? The short answer is yes, it’s a good idea. Let’s think about this. When you buy a home or have one built, you get a warranty deed. This means the seller is saying that they own the property free and clear and they are transferring it to you without any liens/judgements attached to it.

Your first thought would be that if there is any ownership defect it would fall upon the seller, right? Wrong! The seller transferred the risk to the insurance company. The lender is protected by the title policy they make you buy. So what about you? Unfortunately, your stake in the home could be in jeopardy without an owner’s title policy to protect it. This means the money you put into the home, or worst-case scenario, the loss of your property. Is it worth the risk to lose any part of your new home? Probably not. Purchasing an owner’s title policy is a matter of being safe and protecting your home.

Now you’re wondering, how much is it going to cost me to have both policies? Sometimes it doesn’t cost anything. You can potentially negotiate this cost and have the seller pay for it as a contingency of purchasing the home. 

If you do have to pay for it, the policies may not cost as much as you think. Every state will be different, and some states have “deals” (like Texas) when you buy both policies. You can typically expect to pay between $1000-$4000 according to CourtHouseDirect.com, a courthouse data research website. 

The good thing is that you can shop for this closing cost to get the best deal. The American Land Title Association provides a list of insurers by state and city. There are also title insurers online.