On the whole, buying property in the USA is very similar to buying in the UK. But one phrase tends to pull us up short: title insurance! What is it, do we need it and what does it cost? Everything you need to know about title insurance.
What is title insurance?
Title insurance protects both the buyer and the lender from errors in the ownership records of the property being purchased. In the US, there is no guarantee that official records on property ownership are 100% accurate. This means that in some instances parties with older documentation relating to the property can have a claim to it. Should an old claim arise, your title insurance policy will cover ‘perfecting’ your title rights, or it will provide compensation should you lose the property entirely.
If you need extra finance for your US home, read up on all your financing options in our new guide, How to Pay for an American Property.
Typical claims that title insurance will be cover policy holders for, include, errors in the public record, unknown liens (i.e. a right to possess the property until a debt is paid), unknown heirs to the property and fraudulent records.
Your American house purchase, protected by title insurance
What types of title insurance are there?
There are two types of title insurance. If you are buying your property with an American mortgage, lender’s title insurance will be a compulsory part of the closing costs of securing your mortgage. Without this policy in place, it’s unlikely you will be able to secure a loan. Lender’s title insurance covers both the lender and the borrower (you) for legal fees, costs and reimbursements required should another party make a claim to the property. For example, if someone shows up out of the blue claiming your property belongs to them, the lender’s part of the policy will cover defending the claim, which will hopefully resolve the issue. However, should the court decide that this long-lost relative is in fact the true owner of the property, the lender’s policy will reimburse them for what you owe on the mortgage.
If someone else has a viable legal claim to your property, title insurance will cover all your financial losses,
The second type of title insurance is homeowner’s title insurance. As the buyer, whether you invest in the policy is at your discretion, although it is advised. In the case that someone else has a viable legal claim to your property, having homeowner’s title insurance will cover all your financial losses, including your down payment, other major payments and the cost of moving out of the property. Purchasing the policy is usually the buyer’s responsibility, but can sometimes fall with the seller. In cases where the seller is responsible, always review the policy along with your attorney to ensure it provides cover that you’re happy with and that as part of the policy, a thorough title search is conducted.
What period does title insurance cover?
Coverage starts on the day the title insurance cover is purchased. It covers an unlimited period of the past for any known or unknown inconsistencies in the documented ownership of the property the policy applies to.
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What is the process of obtaining it?
Firstly, as with all insurance policies, you need to shop around to find an insurer offering the best policy. When choosing, look for two factors. Firstly, the quality of the cover. Secondly, the quality of the title search conducted. Bear in mind that from state-to-state, title insurers are held to different standards. Some states are far more rigorous than others, which can translate into higher costs due to more thorough checks. Title insurers often offer discounts if you buy both policies (lender’s and homeowner’s) at the same time.
On average, a homeowner policy will cost $700 to $2,000
Once you choose a company, they will conduct a title search to identify any potential red flags. Should this go to plan and there be no identifiable problems, the title company will collaborate with an underwriter to issue your policy.
How much does it cost?
Title insurance is a one-time payment, both for lender’s and homeowner’s insurance. The cost will depend upon the US state that you are purchasing in, the price of the property, and how much you are borrowing (for lender’s title insurance). On average, a homeowner policy will cost $700 to $2,000 (around £550 to £1,550). A lender policy will cost between $500 and $1,500 (£390 to £1,165). When getting quotes for your title insurance, request the complete transaction price, rather than just the cost of the policy, as there will often be hidden costs, such as transfer or courier fees, added to the bill.
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Does title insurance mean I don’t need a lawyer?
We would suggest that you do still need a lawyer. There are particular risks when buying as a foreigner, working in a different legal system than you’re used to. An attorney will oversee all aspects of the property sale for you. Plus, they will be invaluable at helping you to select the best title insurance policy to protect your best interests.
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