In the world of title insurance, there are two types to consider: owner’s title insurance and lender’s title insurance.
These may sometimes be referred to as an “owner’s policy” and a “loan policy” respectively.
Most lenders will require a loan policy to be in place when they issue a loan to you which involves real estate.
The owner’s policy is issued in the amount of the purchase initiate for real-estate. In virtually all situations, it is a one-time fee that is paid during the closing process. Once paid, it will continue to protect the owner as long as they have an interest in the property.
An owner’s policy protects the purchaser should a title problem arise during the transaction. Common hidden problems that can happen with a title include the following situations.
- An omission or error with the property deed.
- A mistake made when examining title records.
- Outright forgery with the title.
- Undisclosed heirs which have rights to the property.
The loan policy protects the lender’s interests in the property if an issue with the title arises for some reason. It will not protect the buyer of the property. It is paid off through the mortgage. The amount begins to decrease as the loan is paid down until it eventually disappears from the equation.
With these policies in place, owners and lenders have the assurance that there is monetary and legal defense in place should a problem arise with a title after property is purchased.
What Is Owner’s Title Insurance?
When you purchase a new home, you receive a document that is called a deed. This document transfers the legal ownership of the property from the seller to you.
With owner’s title insurance, you are protected against a future lawsuit against someone who says they have a claim against that deed after it has been transferred to you. One of the most common lawsuits that happens comes from a tax lien that is on the property from unpaid taxes.
Contractors can also put a lien on a home when they have done work on the property and not received their promised compensation before the deed transfer occurred.
Although an owner’s title insurance policy is usually optional, it is still something to strongly consider. If a lawsuit occurs, without this policy, you will be forced to defend yourself against the claim. That would mean legal fees and judgment costs, if the court were to find in the favor of the other party.
Most mortgage companies and title companies will provide you with options if you are interested in an owner’s policy. You can also work with a third-party insurance provider separate from your mortgage, if you prefer.
Just remember that if you purchase a required loan policy, using the same provider for your owner’s policy will usually save you some money in the long run.
Some insurance companies are required to provide you with an itemized list of fees during the closing process. This doesn’t mean that you are being charged more. It just means that your closing disclosure and loan estimate are separate from this itemized list of items.
What Is Lender’s Title Insurance?
Lender’s title insurance protects the lender against any problems with the title to your new home, much in the same way that an owner’s policy protects you.
If someone sues saying that they have a claim against the home, you will still be the first person responsible. The lender’s policy will cover any claims that would affect the loan provided by the lender to you.
The loan policy will cover the amount of the mortgage or other loan type given to you to purchase the property in the first place. It does not necessarily cover the entire value of the property itself.
Should an adverse claim arise, lenders would be concerned about the fact that their loan would fail to perform as promised. It could even threaten the ability of the lender to foreclose on a property to recover its principal and interest from issuing the mortgage. It may also provide coverage for legal expenses of an uninsured party happens to be involved.
What Options Are There for Owner’s Title Insurance?
Lender’s title insurance is pretty straightforward in most circumstances. It covers the loan obligation by allowing the lender to protect the value of their investment.
Private mortgage insurance may be included with this option, which would provide the lender with value should the owner of a property default on their loan for some reason.
Owner’s title insurance is a little different. Many insurers offer 3 levels of coverage to consider for a new owner’s policy: standard, extended, and premium.
Under a standard policy, owners are protected against impersonation and forgery. It will provide protection against a deed not joined in by a necessary party, undisclosed prior liens, or undisclosed easement or use restrictions.
Standard coverage will also guard against a lack of a right of access, the deed not being properly recorded, and inadequate legal decisions.
Extended coverage is available for owners who may want to protect themselves against additional potential defects.
You would need to have extended coverage to handle off-record matters, like a claim for adverse possession against the property. It will cover land issues which have buildings that encroach on the property of another, deal with incorrect surveys, and handle silent liens, zoning issues, subdivision laws, and CC&Rs.
Premium policies, which are often given a catchy name by the insurer, typically offer 3 additional benefits.
- Protection against forgeries which occur after the policy is initiated.
- Improvements and construction issues by neighbors which occur on land you’ve insured.
- The location and full dimensions of the insured land, with or without a survey.
The bottom line here is this: even if the title defects involved do not cause you to lose the property outright, they could make it difficult for you to sell the property in the future.
Many of the problems which cause title defects happened long ago. An owner’s title insurance policy protects you against the high costs of defending your property rights in court. A loan policy does the same for the interests of your mortgage lender.
Lender’s title insurance is usually required. Owner’s title insurance is usually optional. For most real estate transactions, it is a good idea to pay for both, despite the added expense, to protect your interests in the home you’re trying to secure.