Owner's title insurance: what it protects and whether to buy it

What title insurance protects against

The CFPB explains that owner's title insurance protects you if someone later sues and says they have a claim against the home from before you purchased it. Common sources of claims include a previous owner's failure to pay taxes and contractors who say they were not paid for work done before your purchase.

Unlike most insurance, title insurance looks backward. It covers problems that already existed at closing but surfaced later, not new events after you buy.

Lender's policy versus owner's policy

There are two policies, and they protect different people:

• Lender's title insurance is usually required to get a mortgage. The CFPB says it protects your lender against problems with the title, covering only claims that affect the lender's loan. It does not protect your equity.
• Owner's title insurance is optional. It protects your own financial investment in the home.

The CFPB points out that if someone sues with a claim against your home, you are the first person responsible. Without an owner's policy, you would face that claim with only the lender protected.

How it is paid

The CFPB notes that title service fees are part of the closing costs you pay when getting a mortgage, and the owner's policy premium is paid at closing too. Who pays for the owner's policy varies by local custom and can be negotiated. The CFPB notes that if you buy an owner's policy, the total cost is usually lower when you use the same provider for both the lender's and owner's policies.

Where it appears on your Loan Estimate

The CFPB explains that title service fees, including the title search and the lender's policy premium, appear in section B or C on page 2 of your Loan Estimate and Closing Disclosure. In most states, the fee for conducting your closing is part of those fees too. If they are in section C, you can shop for them. An optional owner's policy appears in section H.

The CFPB also notes that the itemized title fees you receive from the settlement agent or title company may be shown differently from the Loan Estimate or Closing Disclosure, and that a difference in presentation does not necessarily mean you are being charged the wrong amount.

Shopping for title services

The CFPB says you can usually shop for title insurance separately from your mortgage and that shopping could save money. It also suggests researching providers for closing services, including title insurance and settlement agents, early, because things move fast once you find a home.

Read the title commitment

Before closing, the title company typically issues a commitment listing what it found and any exceptions it will not cover, such as easements or recorded restrictions. Read it and ask about anything you do not understand, especially items that could affect how you use the property.

The bottom line

Lender's title insurance protects the lender. Owner's title insurance protects you against old claims on your home. Find title costs on your Loan Estimate, shop providers when allowed and decide on an owner's policy before closing.