Why homeowners need title insurance

Updated by Craig Berry

There are a number of fees involved when purchasing a home. From the down payment, to the home inspection, to prepaid items and closing costs.

With so many mandatory fees, homeowners may be tempted to take a pass on any "optional" closing costs. One such optional fee is owner's title insurance. But should you skip this one?

What is title insurance and what does it do?

A title insurance policy pays the policyholder if there's anything wrong with a property's title.

There are two title insurance policy types: the owner's policy and the lender's policy. Both policies indemnify the party listed on the policy. According to Richard Shafritz of Shafritz & Dean, LLC in Atlanta, GA, "Title insurance as a product started in the 19th century as a way to protect against fraud, errors by practitioners, errors by clerks in recording and other losses."

In the U.S., the deed recorder doesn't guarantee perfect accuracy in its record keeping. This means it's possible for someone with an older document to press a claim against your newly-purchased home, if there's evidence of past fraud or forgery. Title insurance pays the cost of "perfecting" your title rights, or provides compensation if you lose the property altogether.

The only thing standing between you and very heavy losses may be your title insurance policy.

Is it necessary to get title insurance?

While some may disagree about whether owner's title insurance is really needed these days, most experts agree that recent housing market conditions make title insurance more important than ever. Sloppy foreclosure procedures, corner-cutting sellers and flat-out fraud are relevant problems in today's real estate world.

Lender's title insurance policies are mandatory for buyers, owner's policies aren't required. So if it's not a requirement then why does a buyer need title insurance?

Owner's title insurance protects homeowners from:

• Forged transfers of ownership rights in the property
• Previously unreported liens and easements on the property
• Unintentional errors in recording or filing of documents
• Any other defects that existed prior to the start of your policy

The actual number of claims paid out to title insurance holders is relatively small. However, the added cost of owner's title may be a wise investment for homeowners to ensure they're protected.

If and when it's needed, title insurance can save you thousands of dollars in legal fees. In the most extreme situation, title insurance could end up compensating you for the forfeiture of the entire property.

Do I need title insurance if I pay cash?

If you're borrowing money to purchase a home -- getting a mortgage -- lender's title insurance is mandated by mortgage lenders.

When you purchase a home with cash, however, you bypass many of the requirements mortgage lenders have. Lender's title insurance, for example, is no longer required since you're not using a lender.

While it is at your discretion to buy homeowner's title insurance, you should consider the risk of title problems that question ownership rights. In order to properly weigh your options, it helps to know the typical costs associated with title insurance.

Fees can vary according to the state in which you're located. While lender's title policies typically cost between $500 and $1,500, homeowner's title insurance policies tend to be more expensive than lender policies. Owner's coverage generally runs between $700 to $2,000; it can definitely be worthwhile to shop for a title insurance policy in order to save money.

Regardless of the type of policy, location is the biggest cost factor for both lender's and owner's policies.

Skipping homeowner's title insurance: risks

If you're obtaining a home loan, you've probably already noticed one title insurance fee that is included in your closing costs. You're not alone if you were confused by the need to purchase what seemed to be two overlapping insurance policies for your home.

Purchasing a separate owner's policy at closing may seem like overkill. No one likes to pay for an optional expense they may never need. The cost associated with title claim issues, however, can be much more significant. Not having title insurance can put homeowners at serious risk, including the possibility of losing your home.

It was just this year when a Florida woman learned the importance of having owner's title insurance. She purchased her home nearly a decade ago, only to receive an official letter telling her that her home was built on the wrong lot.

Imagine being told the lot on which your home sits doesn't belong to you. The vacant lot next to you is actually yours! Fortunately, this Florida homeowner had purchased homeowner's title insurance which covered her during this unique and complicated situation.

When it comes to protecting your single largest investment, most agree that it's best to avoid the unnecessary risk that comes from not buying title insurance.

Since the policy never expires and can end up protecting you from issues that arise long after you the sell your house, both experienced and first-time homebuyers should seriously consider buying this optional insurance coverage.