Who Normally Pays Title Insurance: Buyer or Seller?

Title insurance plays a significant role in real estate transactions, providing financial protection for both property owners and lenders. Its purpose is to safeguard against potential financial losses arising from defects in a property’s title, such as undisclosed liens, encumbrances, errors in public records, or issues like fraud or forgery. This protection covers past events rather than future occurrences, with a one-time premium paid at closing.

Different Types of Title Insurance

Two primary types of title insurance policies exist: Lender’s Title Insurance and Owner’s Title Insurance. Each serves a distinct purpose and protects different parties involved in the property transfer.

Lender’s Title Insurance

Lender’s Title Insurance, also known as a loan policy, protects the financial institution that provides the mortgage loan. This policy safeguards the lender’s investment against claims or defects in the title that could affect their security interest. It ensures the lender’s lien on the property is valid and enforceable, protecting them up to the outstanding loan amount.

Owner’s Title Insurance

Owner’s Title Insurance protects the homebuyer. This policy shields the owner from financial loss due to covered title defects that existed prior to the date the deed was recorded. Coverage extends to issues such as unpaid taxes, unknown heirs, or errors in records, and it remains in effect for as long as the owner or their heirs retain an interest in the property. While the lender’s policy protects the mortgage holder, the owner’s policy directly protects the homeowner’s equity and legal right to the property.

Payment for Lender’s Title Insurance

Lender’s Title Insurance is universally required by mortgage lenders when a property is financed. This requirement stems from the lender’s need to protect their financial investment, ensuring their loan is secured by a clear title. As such, the cost for this policy is typically borne by the homebuyer as a standard closing cost.

The premium is generally based on the loan amount. This one-time fee is paid at closing and provides coverage for the life of the mortgage. It is important to remember that this policy solely protects the lender’s interest and does not offer any coverage to the homeowner.

Payment for Owner’s Title Insurance

The payment responsibility for Owner’s Title Insurance varies across the United States. This cost allocation is primarily determined by local customs, regional real estate practices, and sometimes state-specific regulations. Consequently, no single party consistently pays for this policy nationwide.

In some regions, it is customary for the seller to pay for the owner’s title insurance policy. Conversely, in other areas, the buyer typically assumes the cost of the owner’s policy. There are also instances where the cost is commonly split between both the buyer and the seller as part of the overall transaction agreement.

For example, in certain areas of Southern California, the seller customarily pays the premium, while in Northern California, the buyer often pays, or the cost is split. Similarly, some states might have regulations where all title companies charge the same premium for a policy, meaning the focus shifts from shopping for price to negotiating who pays. These established practices are usually followed, but they are not always legally mandated.

Negotiating Title Insurance Costs

Despite established regional customs, the payment responsibility for title insurance, particularly Owner’s Title Insurance, is often subject to negotiation between the buyer and seller. The specific terms of the real estate contract can override customary practices. Buyers and sellers can discuss and agree upon how these costs will be allocated during the negotiation phase of the home purchase.

Factors such as the current real estate market conditions can influence these negotiations. In a seller’s market, where demand is high, buyers might offer to pay for the owner’s policy to make their offer more competitive. Conversely, in a buyer’s market, buyers may have more leverage to request that the seller cover these expenses. Additionally, if both the lender’s and owner’s policies are purchased from the same title company, a “simultaneous issue rate” or discount may be available, potentially reducing the overall cost for both parties.