When buying a home, it’s important to check if you have title insurance on the property. Title insurance is a critical component because it not only can protect you, but also your mortgage lender, from any losses that may occur if the title to a property is not free and clear to transfer. There are two different types of title insurance, lender’s title insurance and owner’s title insurance. Here are the distinguishing characteristics of each insurance type:
Lender’s Title Insurance
Lender’s title insurance is a required insurance policy when you buy or refinance a home that reduces the risk a mortgage lender incurs when financing a loan. This policy is paid once and usually by the buyer at closing. The lender’s title insurance policy is typically in the amount of the loan and expires when the mortgage loan is paid in full.
In certain instances, it is clear who the rightful owner of the title is, but there are also situations when it’s not clear who is the legal owner. A title company will perform a title search to ensure the title is clean and that the seller is legally in a position to sell the home and transfer the title. The title company will also issue the policy to the lender.
If the title ownership is contested, and legally upheld, lender’s title insurance safeguards the mortgage lender by paying the lender the outstanding loan amount mitigating financial loss.
Owner’s Title Insurance:
Unlike lender’s title insurance, owner’s title insurance is not mandatory, but should be considered to protect your financial investment. Owner’s title insurance safeguards the homeowner if someone says they have a legal claim against the home before the homeowner bought the property. Instances where this may occur include if there are outstanding liens or lawsuits, the past homeowner did not pay taxes, or if the previous owner did not pay contractors for work completed on the home before you took ownership, among other instances.
If opting for an owner’s title insurance policy, it is a one-time cost at closing and the coverage amount is traditionally based on the purchase price of the home. The policy will remain in effect as long as you have ownership in the home. Normally, the buyer is responsible for the cost of an owner’s title insurance policy. However, if there is a seller credit towards closing costs, the expense of the policy could potentially by paid by the seller in whole or in part in this instance.
Scenarios owner’s title insurance can offer peace of mind in include:
- Limits out of pocket expenses if ownership is being disputed.
- If you purchased an older home, there are likely to have been several past owners and there may be previous surveys or easements you were unaware of at closing.
- If buying a home that is new construction, it can protect you if any land ownership disputes arise based on how the subdivision was constructed.
Each type of title insurance offers protection against title issues with owner’s title insurance protecting the buyer, and lender’s title insurance protecting the lender. Understanding the key differences between the two policies will help you to make an informed decision during the homebuying process and protect your investment.