Why do I have to buy title insurance to get a mortgage?

Q: What does title insurance do?

A: Title insurance protects your lender against any claims that imperil your status as owner and the bank's or mortgage company's right to use your home as collateral on your loan.

Before the loan is approved, your lender will check for any liens that have been filed against the property.

These legal claims are usually found when the current owners fail to pay their taxes, home repair bills or court judgments. They must be paid prior to your purchase being finalized.

The problem is that not all liens show up in a title search.

Title insurance offers protection against any claims that are made after the sale, including charges that the person you bought the home from wasn't the true owner and errors in legal descriptions of the property

Consider the worst-case scenario: Another bank says a previous owner never paid off his or her mortgage and it will now foreclose on you to recoup its money. Your title insurer would be obligated to defend you in court and pay the settlement if they lose.

Title insurance typically costs between 0.3 and 0.5 percentage points of the purchase price.

Q: Do I have to buy the title insurance my lender suggests?

A: No.

After you apply for a mortgage, the lender is required to provide a three-page Loan Estimate, which itemizes all of the terms and fees. Title insurance is one of those costs.

Once you have that, you have every right to shop around for an insurer that will provide the same coverage at a lower cost. Put your online skills to work collecting and comparing premiums, and check Angie's List or the Better Business Bureau to see what companies get high marks. If you find a reputable alternative, the lender will almost always accept it.