Title Insurance: Coverage, Cost and Why It’s Making Headlines

Title insurance is one of those buy-it-and-forget-it financial products you encounter when purchasing a home or refinancing a mortgage — not often a hot topic around the water cooler.

But the insurance is in the spotlight as the Biden administration pushes a plan to lower housing costs.

In his State of the Union address March 7, President Biden announced his administration was eliminating the title insurance requirement for certain mortgage refinance transactions. He said the change could save homeowners $1,000 or more.

The White House said Biden is also asking federal agencies to "take all available actions to lower costs for consumers at the closing table." And the Department of Treasury's Federal Insurance Office will assemble a roundtable this year to discuss the title insurance industry and potential reforms.

These moves are part of a sweeping plan to lower housing costs, including a proposed home buyer tax credit and measures to make it easier for residential builders to get federal financing and produce more affordable homes.

Here's what you need to know about title insurance, whether you're buying a home, refinancing a mortgage or just want to understand what all the fuss is about.

» MORE: Calculate your closing costs

What is title insurance?

Title insurance is a policy that covers mortgage lenders or homeowners against losses related to the title, or ownership of the property.

Say, for instance, you buy a home and there's a hidden lien against the property. (A lien is a legal claim to the property related to outstanding debt.) Perhaps the previous owner stiffed a contractor or didn't pay property taxes. Now the unpaid bill is your headache — and your lender's — because the home is collateral for the debt.

Another nightmarish scenario: Missing heirs of a prior owner come forward and claim the home belongs to them, not you.

Normally problems like this would come to light before the closing, in a title search — an examination of public records to confirm who owns the property.

» MORE: Closing on a house: How long it takes, what to expect

Title insurance pays out in those rare instances when the title search misses something and a legal claim is made. The coverage protects the homeowner and lender from losses stemming from "title defects" that happened before the home purchase.

There are two types of title insurance policies — one for the lender and one for the owner.

Lender's title insurance

The lender's title insurance policy covers the mortgage lender. It's typically based on the amount of the loan and decreases each year as the mortgage is gradually paid off. If there's a problem with the title, the lender's policy only covers the lender's interests, not yours. Usually mortgage lenders require lender's title insurance when you buy a home or refinance a mortgage.

Owner's title insurance

The owner's title insurance policy covers you and is in effect for as long as you or your heirs own the property. Usually the coverage is equal to the purchase price of the home.

Should you buy title insurance?

The mortgage lender will typically require you to purchase the lender's policy when you're buying a home and, in some cases, when you're refinancing a mortgage.

Owner's title insurance is optional, but purchasing it provides peace of mind. An owner's title insurance policy would protect you if there were a dispute over the title. For example, if a hidden lien against your home popped up, the policy would pay the debt, protecting you against a lawsuit from the creditor.

Title insurance cost

Title insurance is a one-time cost paid at closing. Fees vary by state, but a guideline is that title insurance, including the price for the lender and owner policy plus the title search, runs about 0.5% to 1% of the home price. That would be about $1,750 to $3,500 on a $350,000 house. Sometimes there is a discount for buying both the owner's and the lender's policy. Check with the title company for details.

In most states you can shop around for title insurance to find the lowest price. Some states, including Florida, New Mexico and Texas, set title insurance rates.

Who pays for title insurance

Generally the home buyer pays for the lender's title insurance policy. In some regions it's customary for the home buyer to pay for the owner's policy, and in other areas the seller typically picks up the tab. Ask your real estate agent or title company about the custom in your area.

The homeowner pays for both the lender's and owner's policies when refinancing a mortgage.

Biden's push to lower title insurance costs

The Biden administration is piloting a program to waive the lender title insurance requirement for certain conventional mortgage refinance transactions where there is "confidence that the property is free and clear of any prior lien or encumbrance," according to a statement by Sandra Thompson, director of the Federal Housing Finance Agency.

Officials will use an automated process to assess the risk of a title problem and determine whether to require lender's title insurance.

The pilot program is part of an agency effort to look for ways that Fannie Mae and Freddie Mac can cut closing costs for homeowners. Fannie and Freddie are government-sponsored entities that purchase conventional mortgages from lenders.

Before the pilot, lenders could sell loans to the entities only if they had verified through an attorney's opinion or lender's title insurance that the titles were free and clear. In theory, eliminating the verification requirement for “low-risk” loans sold to Fannie or Freddie will lower refinance closing costs for borrowers.

» MORE: Fannie Mae and Freddie Mac: Why They Matter

Title insurance industry slams Biden's plan

"This misguided effort should only be seen as a purely political gesture that offers a false promise of savings for homeowners when in fact all it will do is expose consumers, lenders, and taxpayers to greater financial risk," the American Land Title Association, a trade group representing real estate title professionals, said in a March 8 press release.

Thompson said the pilot will be "subject to robust oversight" by her agency to monitor its effectiveness.

Tips for navigating title insurance

Here are the key points to keep in mind about title insurance:

• The Biden administration's pilot program to waive the title insurance requirement applies only to the lender policy and only to certain conventional mortgage refinance transactions. 

• You still will have to purchase a lender's policy when buying a home.

• You don't have to buy an owner's title insurance policy to protect your interests, but it's a good idea to counter the risk of a title problem wreaking havoc down the road.

• If you bought an owner's policy when you purchased the home, you don't need to buy another policy when you refinance the mortgage. The owner's title insurance covers you for as long as you or your heirs own the home. 

• Unless you live in a state where the government sets title insurance rates, you can shop around for the best deal on title insurance.