Title insurance

Title insurance is a one-time insurance product that covers problems with a property's title that already existed at the time of sale but weren't discovered during the title search. The premium is paid once at closing; the policy lasts as long as the buyer owns the home (for an owner's policy) or as long as the loan is outstanding (for a lender's policy).

How it works: most residential closings involve two title policies. Lender's title insurance protects the lender if a title defect emerges that wipes out their lien, coverage equals the loan amount and decreases as the loan is paid down. The lender almost always requires this policy, and the buyer pays for it as a closing cost. Owner's title insurance protects the buyer if a title defect emerges that affects their ownership, coverage equals the purchase price and stays at that amount. The owner's policy is technically optional in most states, though some require sellers to offer it.

Why it matters: title defects are rare but can be devastating. A forged signature in the chain of title, an undisclosed heir claiming an ownership interest, a missed lien from a prior owner, any of these can come up years after closing and threaten the buyer's ownership. Without an owner's policy, the buyer is uninsured against these.

Common gotcha: the lender's policy doesn't protect the homeowner. Buyers sometimes assume that because there's a title insurance line on the closing statement, they're covered. They aren't, unless an owner's policy is also in place. The line on the settlement statement should show both policies; if only the lender's appears, the buyer is unprotected against post-closing title defects.