Quick overview
Mortgage title insurance is sold as two distinct products: a lender’s policy (required by most mortgage lenders) that protects the lender’s loan balance, and an owner’s policy (optional) that protects the homeowner’s equity and ownership rights. The policy is typically purchased once at closing for a one-time premium and remains in effect while the insured interest exists.
Why title insurance matters now
A clean title at closing doesn’t guarantee the property is free from all claims. Issues can surface years later — unknown heirs, forged signatures, unpaid contractor liens, clerical errors in public records, or fraudulent transfers. Title insurance exists to both defend insured parties against covered claims and to pay valid settlements up to the policy limit. For lenders, it’s standard practice; for buyers, an owner’s policy is often the most cost-effective way to protect thousands (or hundreds of thousands) of dollars in home equity. (See Consumer Financial Protection Bureau: title insurance overview.)
Sources: Consumer Financial Protection Bureau — Title Insurance (https://www.consumerfinance.gov/owning-a-home/closing/title-insurance/) and American Land Title Association — Consumer Resources (https://www.alta.org/consumer/).
How mortgage title insurance works (step-by-step)
- Title search and exam: Before closing, a title company or attorney examines public records to identify liens, judgments, easements, restrictions, or other issues that could affect ownership. This search is intended to reveal most—but not all—problems.
- Curative work: If the search finds problems (unpaid taxes, lien releases needed, unresolved judgments), the title company typically takes steps to clear those items before closing.
- Title insurance issuance: At closing, the lender’s title insurance policy is issued to protect the lender’s collateral interest. The buyer can elect to purchase an owner’s policy for additional protection.
- Post-closing claim handling: If a covered defect emerges after closing, the insurer defends the insured’s title in court and, if necessary, pays losses up to the policy amount.
Lender’s policy vs. Owner’s policy — what each covers
- Lender’s title insurance: Protects the mortgage lender’s interest in the property. It decreases as the mortgage is paid off. Lenders almost always require this as a condition of providing a loan.
- Owner’s title insurance: Protects the homeowner’s ownership rights and equity. It covers legal defense costs and settlements for covered claims and typically lasts as long as the owner or their heirs have an interest in the property.
Why buy an owner’s policy? In my experience working with homebuyers, the owner’s policy is often inexpensive relative to the amount of equity at risk and provides coverage that an attorney’s review or warranty can’t replicate — namely, insurer-funded legal defense and indemnity for covered losses.
Typical costs and who pays
Title insurance premiums and practices vary by state and sometimes by county. Premiums are usually a one-time fee paid at closing and are often calculated as a percentage of the purchase price or loan amount. Nationally, a commonly quoted range for combined premiums is roughly 0.5%–1% of the purchase price, but rates and rate structures differ significantly by state (some states set rates by regulation). Ask for a Good Faith Estimate and a title insurance rate sheet for your state before closing. (See ALTA for consumer rate guidance.)
Who pays? Customarily:
- The lender’s policy is often paid by the buyer in many markets because it protects the lender. In other markets, the seller may pay. Local custom and negotiation at contract stage determine who pays.
- The owner’s policy is optional and usually paid by the buyer, though it can be negotiated.
Common title problems the insurance covers
- Undisclosed heirs or forged signatures on prior deeds
- Unknown or unpaid liens from contractors, judgments, or taxes
- Clerical errors in public records (misfiled deeds, incorrect legal descriptions)
- Fraudulent conveyances or false impersonation of the owner
- Missing or inaccurate wills affecting ownership claims
Not every risk is covered. Typical exclusions include zoning disputes, environmental issues, boundary disputes not revealed by public records, and risks known to the buyer before purchase unless they were concealed.
Real-world examples and lessons learned
- Example 1: Undisclosed heir claim. A buyer discovered, years after purchase, a claim by an heir asserting the property had been improperly transferred decades earlier. The owner’s title insurance company defended the claim and settled (or litigated) instead of the homeowner bearing legal costs directly.
- Example 2: Contractor lien. After a renovation by a prior owner, a contractor recorded an unpaid lien that wasn’t discovered in the initial search. The title insurer paid the lien amount and defended the owner’s title.
In my practice I’ve seen transactions where initial title searches appeared clean but post-closing issues arose, triggering insurer involvement. In each case, having a title insurer saved the homeowner months of legal fees and years of uncertainty.
How to shop and negotiate for title insurance
- Request the title company’s rate sheet and sample policy prior to closing.
- Compare quotes from at least two licensed title insurers in your state; national underwriters often work through local agents with different fees.
- Ask for a split of closing costs in writing in your purchase contract (who pays for lender vs owner policy).
- Consider whether the seller will contribute to an owner’s policy as part of negotiations.
- If refinancing, ask whether you’re eligible for a reissue rate or discounted premium (some insurers offer reduced premiums when the same company previously insured the title and no ownership changes have occurred).
Claim process: what to expect if a title problem appears
- Notify the title insurer immediately and provide documents related to the claim.
- The insurer evaluates if the claim is covered under your policy.
- If covered, the insurer typically retains counsel to defend the title. If the claim is valid, the insurer pays up to the policy limit for settlement or loss.
- If disputed, the insurer may pursue litigation or settlement on your behalf.
Keep copies of closing documents, the title insurance policy, and the title commitment — these will speed any future claim.
Common mistakes and misconceptions
- “My attorney makes title insurance unnecessary.” A lawyer’s review is valuable, but title insurance provides insurer-funded legal defense and indemnity for covered losses that an opinion alone cannot offer.
- “Title insurance is too expensive.” Given the one-time premium relative to potentially large losses or legal costs, owner’s policies are often cost-effective, especially for properties with significant equity.
- “If the title search found nothing, I’m fully protected forever.” Searches reduce risk but can miss hidden defects; title insurance is the protection that addresses those post-closing surprises.
Practical checklist before closing
- Obtain and read the title commitment and ask questions about any exceptions.
- Confirm who is paying for the lender and owner policies in writing.
- Get the title company’s contact info and a copy of the final title insurance policy after closing.
- Ensure the legal description on the deed matches the contract and title documents.
Internal resources
For readers who want to explore related topics, see FinHelp’s guides on Understanding Title Insurance and Why Lenders Require It and common problems in Title Issues That Can Sink a Mortgage: Common Problems and Fixes. Also consider best practices in Title and Vesting Best Practices to Reduce Loss Exposure.
Bottom line
Mortgage title insurance is a practical, one-time safeguard that protects lenders and — when purchased as an owner’s policy — homeowners against many hidden title defects and the expense of defending against adverse claims. While not a substitute for careful due diligence, it is an important tool that reduces the financial risk of property ownership.
Professional disclaimer: This article is educational and does not substitute for legal advice. For guidance tailored to your property, consult a licensed real estate attorney or a title insurance professional. Authoritative sources used: Consumer Financial Protection Bureau and American Land Title Association.
