What it means
The Consumer Financial Protection Bureau explains that when you buy a home you receive a deed showing the seller transferred legal ownership, or title, to you. Title insurance can protect you if someone later sues and says they have a claim against the home from before you bought it.
Examples include a previous owner's unpaid taxes or contractors who say they were not paid for earlier work. There are two forms commonly bought in a residential purchase.
The CFPB's TRID factsheet says lender's title insurance protects the lender against title problems and is generally required by the lender. Owner's title insurance protects the buyer's own financial investment and is typically optional.
The owner's policy does two things. According to the CFPB factsheet, it indemnifies the buyer for a loss from a covered title issue.
It also requires the title insurer to defend the buyer's title against litigation over certain title issues that arise after purchase, and some companies offer an enhanced owner's product with added coverage that may grow as the property appreciates. Cost and shopping matter, and the CFPB says you can usually shop for a title insurance provider separately from your mortgage, which could save money.
If you buy both policies, the total is usually lower with the same provider than buying them separately, because title companies often offer a simultaneous rate for a lender's policy when the same company issues both. The factsheet describes how this is disclosed in the US: the owner's premium shown on the Loan Estimate and Closing Disclosure is calculated as (full owner's premium + simultaneous lender's premium) - full lender's premium, while the lender's policy is shown at its full premium.
Because of that formula, figures on your federal disclosures can differ from what a title agent quotes under state practice. The CFPB says a different itemised figure at closing does not necessarily mean you are being charged the wrong amount, so ask the settlement agent to reconcile the two.
Title insurance does not replace checking the title. It covers losses and defence costs for covered title problems under the policy terms.
Read the policy for exclusions, and rules and practices differ by country and state.
In practice
Real-world examples.
Example
A fictional buyer closes on a house and later learns that the previous owner never paid a tax bill that became a claim against the property. The owner's policy covers a defence against the claim, subject to the policy terms.
Example
A fictional lender requires a lender's policy equal to the loan amount. The buyer pays the premium at closing. The policy protects the lender, not the buyer.
Example
A fictional buyer asks two title companies for quotes. One quotes both policies together at a simultaneous rate. The buyer compares the combined cost with separate quotes.
Formula
Calculation
Owner's premium on US federal disclosures = (full owner's premium + simultaneous lender's premium) - full lender's premium. The CFPB factsheet uses a full lender's premium of $1,175, a full owner's premium of $2,568 and a simultaneous lender's premium of $200. Example: ($2,568 + $200) - $1,175 = $1,593.
The disclosures then show the owner's premium at $1,593 and the lender's premium at its full $1,175, which add to $1,593 + $1,175 = $2,768. That equals the amount actually payable when both policies come from the same company: the full owner's premium of $2,568 plus the simultaneous lender's premium of $200 is also $2,768. Buying the two policies separately at full premiums would cost $2,568 + $1,175 = $3,743, so the simultaneous rate saves $3,743 - $2,768 = $975 in this example.Case study
Seen in the real world.
This case study is fictional and illustrative. Sam buys a home with a mortgage. The lender requires a lender's title policy, and Sam can also choose an owner's policy. Sam asks the settlement agent for quotes and also asks a second title company.
Using the CFPB's illustrative numbers, the full lender's premium is $1,175 and the full owner's premium is $2,568. The same company offers a simultaneous lender's rate of $200. The Loan Estimate shows the owner's policy as ($2,568 + $200) - $1,175 = $1,593. The title agent's own quote shows the lender's simultaneous rate and the full owner's premium.
The two sheets look different, so Sam asks the settlement agent to explain. The agent walks through the formula and the figures reconcile. Sam buys both policies from the same company and keeps the policy documents. The lesson is to compare providers and to read the policy, not just the premium.
Watch out
Common mistakes.
- Assuming the lender's policy protects the buyer, when it protects only the lender.
- Skipping to price shop, when you can usually choose your own title insurance provider.
- Treating a different figure on the closing paperwork as an error, when the federal formula and state quotes can differ.
Questions
People also ask.
What does title insurance cover?
It protects against title problems that come from before your purchase, such as an old unpaid tax or contractor claim. Coverage follows the policy terms, so read exclusions.
Do I need owner's title insurance?
Lenders usually require their own policy. An owner's policy is typically optional and protects your own investment.
Can I shop for title insurance?
Usually yes. The CFPB says you can often shop separately from your mortgage and may save money.
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