Do We Need Owner's Title Insurance When Buying a Home?

Owner's title insurance protects a property owner from legal challenges to the title of the property. For example, if the seller received the home through an inheritance, another relative could surface claiming to be the proper owner of the home. Though each buyer will have to determine for themselves whether or not to purchase owner's title insurance, it is important for owners to understand how the insurance works.

Definition

Title insurance provides financial compensation in the event that the title is not legal. There are two types of title insurance, lender's and owner's. Lender's title insurance, which the lender will require, reimburses the lender for the amount of the mortgage if a title problem arises. For example, if there is a problem with the title and the owner has $100,000 in equity and $100,000 left on the mortgage, the lender's title insurance will pay off the mortgage. Owner's title insurance covers the owner for the amount of equity the owner has in the home.

What It Covers

Title insurance covers a number of problems with the title, referred to as title defects. Some title defects insurance covers include problems from improper inheritances, spousal claims, property record errors, incorrect property descriptions and forgery. In the case of a legal challenge to the title, title insurance typically pays the legal fees needed to defend the title in court. An owner can also choose enhanced coverage that will cover incorrect surveys, zoning violations and other problems.

Cost

Cost is the primary reason most people refrain from buying owner's title insurance. As an owner pays title insurance in one lump sum when buying a home, the cost is significant at a time when the buyer is making perhaps the largest purchase of her life. However, there are ways to reduce the cost of owner's insurance. As with other insurance policies, consumers should shop for coverage from a number of providers to find the best deal. Also, companies may provide a discount if a person buys both the lender's and owner's insurance from the same company.

Related Information

Owners can also purchase title insurance when refinancing a mortgage. If the owner already has owner's title insurance, during a refinance nothing changes about this policy and the owner does not have to buy a new policy. However, the new lender will require that owner buy a new lender's title insurance policy. Owners can use insurance rating companies such as A.M. Best, Moody's and Fitch to determine the financial strength of the insurer offering the title insurance.

References

• Bankrate; 6 Questions To Ask About Title Insurance; Dana Dratch; December 2009
• Realtor.com; Title Insurance: Who Needs It?; Courtney Ronan
• The Wall Street Journal; Why Buy An Owner's Title Insurance Policy?; June Fletcher; April 2011
• The Boston Globe; Title Insurance Demystified: Do Homeowners Really Need It?; Rona Fischman; August 2009