buying your first home - what you should know

What Is Title Insurance & Who Should Pay for It?

One of the costs associated with the purchase of a home is for buying title insurance. The cost of title insurance is among the many financial transactions accounted for on the date of closing. Home buyers may be able to reduce the cost of closing by negotiating which party is to pay the expense of title insurance.

Title insurance is typically required when you obtain a new mortgage. Title insurance protects the lender and buyer in the event that a defect is later discovered in the property title. In fact, a lenders's title insurance policy is usually separate from a buyer's title insurance policy. Separate insurance policies are necessary because the interests of the lender and buyer are somewhat different.

Purpose of title insurance

Title insurance reimburses a lender if a mortgage loss occurs due to a defective property title. Because the buyer is the originator of the loan, the buyer customarily pays the cost of title insurance that protects the lender. The home buyer stands to lose any equity in the home if the title is defective. Buyer's title insurance is usually optional, and the cost can be borne by either buyer or seller.

The party responsible for paying the cost of title insurance should be specified in the purchase offer. If you pay the cost of lender's title insurance, you don't necessarily have to obtain a policy based on the recommendation of the seller or your mortgage company. A federal consumer law allows home buyers to make their own selection of lender's title insurance.

RESPA consumer protection

The Real Estate Settlement Procedures Act prohibits home sellers from requiring a home buyer to use a particular title insurance company. However, a seller is allowed to request a specific insurance company if the seller pays for the lender's title insurance. As a result, you might include a clause in your purchase offer specifying under what conditions the buyer or seller will pay for title insurance.

The buyer's title insurance policy is also referred to as the owner's policy, since the seller of a home is no longer the owner. If a home seller pays for your owner's title insurance, the seller is allowed to choose the company used for that policy. If the seller is unwilling to pay for owner's insurance, you may find it beneficial in the long run to pay for that policy yourself.

Unlike other types of insurance coverage, title insurance has no recurring premiums. The single premium paid up front can provide protection for decades. Contact a real estate firm for more information on finding a single-family home for sale.