Title insurance protects the home buyer and mortgage lender if there’s a discrepancy with a home’s title. The cost of title insurance varies by state and value of the home but typically ranges from a few hundred to a few thousand dollars. These costs are paid for during the sale’s closing.
Getting and paying for title insurance is usually the responsibility of the homebuyer. However, some U.S. municipalities require the seller to be responsible. This article will assume the buyer is paying for coverage.
What Is Title Insurance?
If you’re buying a home and getting ready to close on the transaction, you need to know about title insurance.
Title insurance is a form of coverage that provides financial protection from problems related to the home’s title. These problems might include mistakes with the deed recording, disputes over the property between a previous owner’s heirs, undisclosed easements that limit the use of the property, unpaid property taxes, or contractor liens for unpaid work.
Such problems might have happened years ago, long before even the current owner held the property title. But if they go undiscovered during your purchase, they become your problems once you own the home. And they can be costly to resolve.
This is why a title insurance policy is issued before the title transfer and only after a title company thoroughly researches relevant public documents related to the property, such as court papers, wills, and divorce decrees. Hopefully, this inspection reveals nothing that might derail the sale. The seller should resolve any issues before the sale closes and the title transfer occurs.
Once the insurance is in effect, it protects you and your mortgage lender from any other potential title issues — which could crop up even after the title company's inspection — for as long as you own the property.
Lender's Title Insurance vs. Owner's Title Insurance
There are two types of title insurance. Each provides the same essential function but for different parties involved in the home purchase.
- Lender’s title insurance protects the mortgage provider. It insures their investment in the property up to the value of the mortgage. Expect the mortgage lender to require this coverage to be purchased.
- Owner’s title insurance protects you, the homebuyer, up to the home’s sale price. While typically an optional coverage, it can provide added peace of mind as you invest a significant amount of money in your home purchase.
How Much Does Title Insurance Cost?
Title insurance is one of the most expensive items in a home sale’s closing costs.
The cost varies by state and property value. Some states have fixed premiums, meaning the price is the same no matter who provides the coverage. Other states have unfixed premiums, meaning providers can set their own rates.
The lender Rocket Mortgage advises home buyers to have a title insurance budget of 0.5% to 1.0% of the home’s sale price. For a home priced at $350,000, that equates to $1,750 to $3,500. They also estimate total closing costs to be 3% to 6% of the value of the mortgage.
How to Get Title Insurance
By law, your mortgage lender must send you a list of title insurance companies within three days after receiving your loan application. You can choose a provider from this list or shop around to find your own. Alternatively, you can search for title companies in your area through the American Land Title Association’s website. Your real estate agent also may have recommendations.
Choosing a title company can significantly affect your home buying experience. So do your research, read client reviews and business ratings, and ask any friends and family members who’ve recently purchased a home for referrals.
Are Title Insurance Costs Tax-Deductible?
If you buy title insurance when buying a home, the costs are not tax-deductible on your federal income taxes. However, as it’s part of your initial investment, you can add the cost of title insurance to the cost basis of your home. This can reduce any capital gain you realize when you eventually sell, which may reduce the amount of capital gain tax you owe the government. Consult with a certified tax advisor when reporting this on your return.
How to Save on Title Insurance Costs
- Ask the seller to help. Asking the seller to pay some or all of the closing costs, including title insurance, is often part of the negotiation process. Just be wary of this tactic in today’s seller's market. Your real estate agent can advise whether this is a good idea for your home purchase.
- Negotiate added fees. The title insurance provider may try to add extra fees to the premium. Ask if these are optional or if the provider would be willing to charge less for them.
- Bundle lender's and owner's title insurance. Ask if your provider offers a discount for buying both policies from the same source.
- Shop around. Unless you’re buying a home in a state with fixed title insurance premiums, you may find that the cost of coverage varies significantly between providers. Check with at least three to four to see who offers the lowest premium.
A Necessary Expense When Buying a Home
As a new homeowner, you’ll have plenty of things to think about related to your new home. Having title insurance means a problem related to your home’s title doesn't have to be the source of any stress. It’s a costly but necessary expense that can provide valuable peace of mind