Taking out a mortgage is risky. It is not just risky for you though. It is also risky for the lender. The only way to protect both parties is with title insurance. But, there is more than one type of title insurance. Each are mutually exclusive. Lender’s policies do not protect buyers, just like buyer’s policies do not protect lenders. We will discuss their differences below.
Start With the Title Search
As a part of the purchase process, your lender will order a title search. A title examiner will search the public records regarding your property. They look at tax documents, court documents, and any government records. Along with the examiner, attorneys and underwriters will look at the documents. Together everyone will determine if the property is safe for purchase.
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If the property is deemed “clear”, you can purchase it without worry. In other words, the examiner states that the past transactions are all legal and no one should stake a claim in the property. They also claim that there are no current liens on the property. The insurance companies then issues title insurance, which guarantees the status of the title. Unfortunately, things outside of the examiner’s control often happen. Documents get overlooked or things come up that were not uncovered before. This is when the title insurance comes into play.
Lender’s Policies are Required
The major difference between lender and buyer’s policies is that lender’s policies are required. You do not have a choice. Unfortunately, the policy does not cover you in any way, shape or form. It only protects the lender. The policy covers the lender in the face of any of the following:
- Someone else claiming an ownership interest in the property
- Incorrectly recorded documents
- Forgery
- Fraud
- Liens
- Encroachments
- Easement issues
As an example, let’s say someone came to you and said they have a deed to your property. This is after you have already closed on the loan. If the deed were real, you stand to lose your home and the bank stands to lose a lot of money. The lender’s policy protects the lender in this type of issue. Whether you would keep the property or not is another legal issue. However, the lender’s insurance policy would pay the bank the money it lost if that were the case. It would not, however, pay you anything, unless you have an owner’s policy.
Owner’s Policies are not Required
Owner’s policies are policies that protect you, the owner. They have nothing to do with the lender. This policy helps you protect your interest in the property. It protects you in the event that your title was not clear at the time of purchase. You would hope that it was, but nothing is foolproof. The only way to make sure is to insure your interest in the property.
Owner’s policies can even protect against things like incorrectly placed liens on the property. It sounds bizarre, but it happens all of the time. You cannot predict what will happen. Since you only pay the premium one time and carry it for as long as you own the home, it is often well worth the money. If nothing else, it gives you peace of mind. Owner’s policies cover the following:
- Insures your interest in the property
- Protects you against any liens or claims on the property
- Protects you when you try to sell the property and any lien issues surface
- Protects your access to the property
In addition, the policy will help you cover attorney fees or other legal fees you incur as a result of the title issues.
Can you Transfer Title Policies?
Unfortunately, you can’t transfer lender or owner’s policies. Any time you purchase a property or even refinance it, you will have to buy a new policy. The owner’s policy stays in effect for as long as you own the home, though. Even if you refinance you will not have to pay for a new policy. Every time you take out a new loan on the property, though, you will have to take out a new lender’s policy. This does mean paying for a title search and insurance each time. But, each lender needs their own insurance policy in order to protect their investment.
Shopping Around for Title Insurance
Most lenders have a title company they already work with on a regular basis. They usually provide you with the best deal. But, if you think you can find a better deal on title insurance and/or closing costs, you may shop around. Keep in mind, not every lender will allow you to shop around. This should be one of the first questions you ask if you want to shop the insurance. If a lender refuses to let you shop the insurance, you can use a different lender. Typically, title insurance rates will remain similar from each company. What may differ, however, are their other fees. If you stand to save enough money, it can be worth shopping around.
The bottom line is that title insurance is important. Both lender’s and owner’s policies protect everyone invested in the purchase. While it might seem like just another expense you have to pay, it protects you in the long run. Even though you have the title search completed, there could be issues that come up down the road. This is especially true if you buy a fairly older home. There is a long chain of owners down the line that could come back and stake a claim. In today’s world, it just makes sense to pay for lender’s title insurance to make sure everyone is properly covered.
