Almost any loan program you can think of today requires there to be title insurance for the lender, at a minimum. The VA loan is an exception to the rule, though. The VA itself does not require title insurance for a purchase or refinance. That being said, each lender can require it if they so desire. Chances are, a majority of lenders available today will require it because it protects them against many different potential issues which could come up down the road.
What is Title Insurance?
Title insurance protects the lender and possibly the owner, depending on the policy, against any financial issues or loss of a home due to unforeseen circumstances. This could include liens on the title, issues with ownership transfer in the past, or encumbrances. While these issues should be obsolete after a title search, if it was effective, there are ways for things to slip through the cracks. Human error, incorrect recording, and fraudulent activity are just a few of the issues that can cause potential financial and ownership issues in the future.
How Title Insurance Differs from Other Insurance Types
Title insurance is unique. Unlike car or health insurance, it does not cover against future issues with the home. Instead, it covers you against issues from the past. It helps to keep you from becoming financially liable for issues you had nothing to do with in the first place. For example, let’s say someone came forward and said they were the owner of the house. This might be true if there was some type of issue with the transfer of ownership. Rather than forcing you to give up ownership, though, the insurance policy protects you against such issues.
Isn’t the Title Search Enough?
The title search is often enough to ensure the title is free and clear for you to take ownership. However, issues beyond anyone’s control can occur. The VA does not allow property to change hands until the lender is certain the title to the property is acceptable to all parties involved. Sometimes, however, this is not enough. This is when title insurance comes into play and is why many VA lenders require it despite the VA’s lack of requirement.
The Difference Between Lender’s and Owner’s Policies
There are two types of title insurance policies – lender and owner policies. Generally, lenders require only the policy which covers their investment. This means an insurance policy in the amount of the loan amount. This way if something were to happen down the road and someone were to come after you, the lender’s investment is covered. In addition, however, you can secure an owner’s policy. This helps to protect your equity in the home. If someone were to sue you due to a lien on the home, you would be responsible for paying it if you did not have the owner’s policy. Unlike other insurance policies, the owner’ policy is a one-time premium and you maintain coverage as long as you own the home.
Should You Purchase an Owner’s Policy?
Closing costs can get expensive, but you should make sure you have room to pay for an owner’s policy. VA loans and any other loan program do not require the purchase of an owner’s policy. It differs from the lender’s policy and obviously, a lender worries about their interest alone. Because of this, purchasing an owner’s policy helps protect your interest. In fact, your interest in the property increases over time, unlike the lender’s interest. As you pay down your mortgage, you increase your equity. This means you have more to lose if an issue were to arise because of a past lien. Most title companies recommend that you purchase an inflation rider as well in order to protect the increase in value your property will likely have over the course of the next 30 years. The cost of an owner’s policy is much less than the lender’s policy and often costs less than $1,000. Given what it protects against, it is well worth the investment.
Talk to your lender about what he requires in terms of title insurance for a VA loan. Chances are most lenders will require it. Even if they don’t, you should consider it. The upfront investment now protects you for as long as you own the home. It is a small price to pay for protection against the unknown. There is no way to predict what could happen down the road. You want to assume the title search is enough, but human error and fraudulent activity make it impossible to make sure you know what may come your way.