Purchasing a home can be one of the most exciting experiences in life and making sure your new investment is protected should be top of mind. Whether you’re buying your home in cash or taking out a loan, purchasing both homeowners insurance and title insurance is the best way to make sure your home is protected for years to come.
But what is the difference between homeowners insurance and title insurance? And why do you need both?
The short answer is that homeowners insurance protects you from what might happen, while title insurance protects you from things that may have already happened but are unknown or hidden. Both can have significant financial impact on homeowners, so let’s explore them in more depth.
Many people are familiar with the benefits that homeowners insurance provides. This is a policy the homeowner pays monthly, quarterly or annually that includes coverages that may help pay to repair or replace your home and belongings if they are damaged by certain perils.
Homeowners insurance may cover things like:
- Damage to the contents of your home
- Theft of personal property in your home
- Living expenses if your home is uninhabitable
- Damage to your home caused by fire, hail, windstorm and vandalism
- Personal liability for bodily injury or accidents to guests in your home
- Structural damage to your home or detached structures
Homeowners insurance may cover damage sustained to your home or its contents due to a natural disaster, but states may vary in how they address a natural disaster. You may be able to add additional coverage to a standard policy for things like earthquake or flood insurance.
On the other hand, title insurance is a way to protect yourself from financial loss and related legal expenses in the event there is a defect in title to your property that is covered by the policy. With title insurance, title examiners review the history of your property and seek to eliminate title issues before the purchase occurs. Title insurance also differs in that it comes with no monthly payment. It’s just a one-time premium paid at closing.
Title insurance covers things like:
- A defect in title caused by forgery, fraud, undue influence, duress or incompetency
- A defect in title caused by undisclosed prior mortgage or other liens
- No right of access to and from the land
- A defect in title caused by improper execution of documents
- A defect in title caused by documents not being properly filed, recorded or indexed in the Public Records
Before issuing title insurance, your title company will perform an exhaustive title search to determine that the property is free and clear of encumbrances or defects. If anything is found, these title issues should be addressed before you buy the property and title insurance policies are issued at closing. Despite this title search being performed before closing, the most skilled title professionals may not find all problems associated with a property. Some risks, such as title issues due to filing errors, forgeries, or undisclosed heirs, are difficult to identify. This is why purchasing title insurance is important.
If you are purchasing your home with help from a lender, they will likely require you to purchase a lender’s title insurance policy. There are two types of title insurance policies:
A Lender’s Policy: This policy is what your lender often requires you to purchase. Because your lender has an interest in the property until you pay them back, this policy protects only your lender from valid claims on the title to your property. This covers your lender for the amount of your mortgage loan.
An Owner’s Policy: This policy is what protects you in case someone makes a valid claim on your property. This is an optional purchase that covers you for as long as you or your heirs own the property. This policy covers you for the purchase price of your home.
Carrying both homeowners insurance and title insurance play an important role in keeping your investment protected.