Title insurance is an effective way to protect against financial loss and certain legal expenses related to defects in a property title. What makes title insurance different from other types of insurance is that it focuses on risk prevention instead of risk assumption. When a person buys title insurance, a title company searches public records to identify the property’s ownership status. Once the search has been completed, an underwriter determines the insurability of the title. There are two main types of title policies for owners: owner’s title insurance and lender’s title insurance. Here is a look at both of these policy types and whether or not each is needed when buying a home.
What Is An Title Policies For Owners?
Owner’s title insurance provides homeowners with protection in the event of a lawsuit in which a person says they have a claim against the home from a time before the current homeowner purchased the property.
When purchasing a home, the homeowner receives a document known as a deed. The deed shows that the seller transferred their legal ownership (title) to the new owner. In rare cases, a person may later sue and claim that the home or its value rightly belongs to them. For example, a contractor who was not paid for work done on the home before it was purchased may file a lawsuit. A previous owner’s failure to pay taxes on the home could also lead to title issues.
Unlike lender’s title policies, owner’s title insurance is not legally required by law. However, if a homebuyer does choose to purchase title insurance, they have the choice of which title insurance company to choose to conduct the search. The seller or real estate agent may provide suggestions that could be of value. Either the seller or the buyer may purchase an owner’s title insurance policy on behalf of the buyer. The local real estate customs will generally dictate who should pay for the policy.
An owner’s title insurance policy helps cover the costs of paying off any previous and undiscovered liens against the property. Insurance can also be used to help defend against lawsuits filed against the new homeowner by someone who is claiming a right to the home. In some cases, owner’s title insurance can provide the new homeowner with a cash settlement who unwittingly bought a property with a forged deed from a seller who did not actually own the home.
While owner’s title insurance covers many situations, these policies do have their limitations. For example, owner’s title insurance does not protect against title problems caused by the homebuyer, such as failing to pay property taxes or a contractor.
What Is A Lender’s Title Insurance Policy?
An owner’s title policy is designed to protect a homeowner against title issues but a lender’s title insurance policy aims to protect lenders against problems with a title. Most lenders require borrowers to purchase a lender’s title insurance policy before they can get a mortgage loan. Lender’s title insurance only protects against claims that may affect the lender’s loan and do not protect the homeowner’s investment (equity) in the home.
man in a suit offers to sign a contract holding a pen and documents for signature for title policies for owners Lenders that provide a mortgage loan must first determine if there is a lien in the first position. If there is an existing mortgage on the home, it must be satisfied before or at closing to prevent the new loan from going in second or a worse position. Lenders that offer first mortgage rates typically require a first lien position. In the event of a foreclosure on the home, whoever is in the first position receives payment first.
A lender’s title insurance policies insure the lender against issues that may have been missed during the title search. During a title search, the ownership of the property and lien status is established, but, in some cases, defects may be missed.
Lenders generally require homeowners to purchase a lender’s title insurance policy that covers the full amount of the loan. For example, if the loan is for $300,000 then the lender’s title policy must be for $300,000.
Just like an owner’s title insurance policy, a lender’s title insurance is paid in an upfront, one-time payment, meaning there are no monthly or annual premiums. The lender’s policy remains in effect as long as the loan exists. However, an owner’s title insurance policy remains in effect over the entire length of the property owner. Selling the home and obtaining a new loan means that the owner will need to pay the lender’s title insurance premium again.
