This is the second in a two-part series that explains how to buy a home…
When buying a home in California, you’ll have an opportunity to purchase an owner’s title insurance policy. And if you’re using a mortgage loan to finance your purchase, you’ll probably be required to purchase a lender’s title insurance policy.
These commonly used policies give home buyers and lenders important legal protections relating to the title (or ownership) of the home being purchased.
But what is title insurance, exactly? How much does it cost? And what kind of protection does it provide to you, as the new homeowner? Below, we have answered these and other frequently asked questions regarding title insurance in California.
Title Insurance in California: The Basics
Let’s start with a basic definition. On its website, the California Department of Insurance defines it this way:
“Title insurance is a contractual obligation that protects against losses that occur when title to a property is not free and clear of defects (e.g. liens, encumbrances and defects that were unknown when the title policy was issued).”
The “losses” mentioned in the above quote would be legal expenses or other costs relating to a claim against the property. A “defect” is an error, omission or other complication related to the title or ownership of the property. A “lien” is a legal claim made against some kind of asset, a home in this case.
In plain English: A title insurance policy protects the lender and homeowner against legal claims and/or disputes made against the property.
You might notice we mentioned the lender and the homeowner in the above statement. That’s because there are two basic types of title insurance in California — one that covers the lender, and one that covers the property owner. They are commonly referred to as the lender’s policy and the owner’s policy.
If a legal claim or challenge is made against the property, the owner’s title insurance policy will essentially fund your court defense. The title claim might be resolved in your favor, or it might go the other way. In those cases where a homeowner is unsuccessful in their legal case, the title insurer will usually reimburse the homeowner up to their total investment (depending on the specifics of the policy).
An owner’s title insurance policy is not required in California. But it could offer you valuable legal protection at a relatively affordable price.
Who Pays for Owner’s Title Insurance?
To reiterate: There are two basic types of title insurance in California — the lender’s and the owner’s policy. Home buyers using mortgage loans are usually required to pay for the lender’s title insurance. It’s one of the closing costs.
Unlike homeowners insurance, which is paid monthly for as long as you hold the policy, the title insurance premium is a one-time fee that’s payable at closing.
As for who pays title insurance, this can vary. Certain customs have arisen in the northern and southern parts of the state. But even those customs can vary.
To quote the California Department of Insurance again:
“In Southern California, the seller customarily pays the premium for title insurance. It has been the practice in Northern California that the buyer customarily pays the premium for title insurance, or occasionally the premium is split between buyer and seller.”
That’s for the owner’s title insurance policy. In most counties across the state, the home buyer is usually the one who pays the lender’s policy.
As with other closing costs, home buyers usually receive an up-front estimate regarding the cost of title insurance premium to be paid at closing. So there shouldn’t be any surprises as to what you have to pay on closing day.
How Much Does It Cost?
The cost of a title insurance premium can vary based on the loan amount, the type of property being purchased, and other factors.
In California, the cost of lender’s title insurance can vary greatly due to differences in home values. A home buyer might pay anywhere from several hundreds dollars to more than a thousand dollars, depending on the loan amount and other factors.
It’s common for the owner’s title insurance policy to cost more than the lender policy, in California and also nationwide. Premiums vary based on the amount of coverage built into the policy and other factors. A higher degree of coverage typically results in a higher premium, and vice versa.
It bears repeating — there shouldn’t be any surprises. You’ll receive an estimate of title insurance and all other closing costs up front, when applying for a loan. You’ll also receive a finalized list of closing costs later on, when you’re about to close. And anytime you have a question, you can ask your loan officer or title insurance company for clarification.