Do You Need Title Insurance When Buying Property?

If you are borrowing to buy property, your lender will require a title insurance policy, and that policy protects the lender alone. Whether you also buy an owner’s policy is your call, and it is one of the few closing costs that can save the property itself. Title insurance covers defects in ownership that existed before you took title: a forged signature three transfers back, a lien the last owner never paid off, an heir who never signed the deed. No home inspection finds those problems, and they can surface a decade after closing.

What title insurance covers

A title policy looks backward. The insurer searches the public records, decides the title is insurable, and then agrees to defend you against covered claims and pay covered losses up to the policy amount. The standard owner’s policy covers title being vested in someone other than you, defects or liens on the title, lack of a legal right of access, and unmarketability of title. In practice that means forged or improperly executed deeds, unreleased mortgages, judgment liens, errors by the recorder’s office, missing heirs, and conveyances by someone who lacked capacity or authority.

Two features matter most. First, the insurer pays the cost of defending your title in court, which is often the larger expense. Second, you pay the premium once, at closing, and coverage lasts as long as you or your heirs hold an interest in the property. Compare that to hazard insurance, which renews yearly and covers only future events.

Our real estate practice reviews the title commitment before closing for exactly this reason: the policy is only as good as what it insures, and the commitment tells you what the insurer has decided to leave out.

Lender’s policy versus owner’s policy

The lender’s policy insures the mortgage, in the amount of the loan, and its coverage shrinks as you pay down principal. If a title claim wipes out your ownership, the lender collects on its policy and you are left with nothing. The owner’s policy insures your equity, in the amount of the purchase price, and does not decline over time. Many enhanced owner’s policies also increase coverage for a set period to track rising values.

Because both policies come from the same search, buying them together at closing is cheaper than buying the owner’s policy later. In most markets the simultaneous-issue rate for the second policy is a small fraction of the first. Ask the settlement agent for the quote before you decide.

A cash buyer has no lender and therefore no policy at all unless they buy one. That is the buyer who most needs an owner’s policy, because there is no bank underwriter behind the deal checking the title on anyone’s behalf.

Schedule B: what the policy leaves out

Every policy carries a Schedule B listing exceptions. Standard exceptions include matters a survey would show (encroachments, boundary disputes), rights of parties in possession, unrecorded easements, and mechanic’s liens for work not yet recorded. Specific exceptions list recorded items the insurer will not cover: existing easements, restrictive covenants, condominium declarations, and any lien the seller must pay off at closing.

Read this schedule before closing, not after a claim. Some exceptions can be removed. A current survey, for instance, lets the insurer delete the survey exception. An owner’s affidavit can clear the parties-in-possession exception. If a recorded easement runs under the spot where you plan to build a garage, you want to know now, while you can still negotiate or walk away under your purchase contract contingencies.

The title search is not the insurance

Buyers sometimes assume the title search alone protects them. It does not. The search is the insurer’s work product, and its errors are the insurer’s problem only if you hold a policy. A quitclaim deed from a seller, or a bargain and sale deed in New York, carries few or no promises about the chain of title, which makes the owner’s policy the only real protection against hidden defects. Our note on warranty deeds versus quitclaim deeds explains how deed warranties and title insurance work together.

When an owner’s policy earns its premium

Consider the claims that show up in practice: a prior owner’s contractor records a lien after closing for unpaid work; a divorce decree transferred the property but the former spouse’s deed was never recorded; a tax sale years earlier was defective; a neighbor’s driveway sits on your lot. Each can cost more in legal fees than the one-time premium, and the policy pays those fees.

The case against buying is thin. The premium is a modest one-time cost against a loss that could equal the full purchase price. For foreign buyers in particular, who may be purchasing without a local lender and cannot easily monitor the records from abroad, the owner’s policy is the baseline protection we recommend. Our guide to buying a home without U.S. citizenship covers the other pieces of that transaction.

If you have a closing scheduled, ask for the title commitment and the policy quote now, and have them reviewed before the settlement date. A commitment with a problem on it is easier to fix in a week than at the closing table. Our commercial and residential transaction counsel includes that review, and our walkthrough of what happens at closing shows where the policy fits in the sequence.

If you are deciding whether to buy an owner’s title policy or want a title commitment reviewed before closing, a consultation with Capitol Law Partners can clarify what the exceptions mean for your purchase. Schedule a consultation.

This article is for informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by this communication.

Attorney Cagatay Ersoy. Practical strategy for founders, investors, and growing companies.

Need help with this topic? See our real estate law page or schedule a consultation.