When you buy a home, you have to take out title insurance, or at least you do if you borrow money to buy the home. Lenders require a policy that covers their interests in the property should someone try to stake a claim to the property after you close on it. Did you know that there’s also an owner’s title insurance policy? Lenders don’t require this insurance, but it’s highly recommended for all buyers, even those that pay cash for the home.
Looking for Current Mortgage Interest Rates? Click Here.
What is Title Insurance?
When you buy a home, a title company runs a search on the home’s records. They look as far back as they can to determine that the home legally changed hands as many times as it did. They also look for any outstanding liens on the home that don’t pertain to the mortgage.
After the title search, the title company will issue title insurance. The insurance covers either the lender or the owner against any defects in the title that may have been missed. Both lender and owner’s title insurance have a one-time premium that you pay at the closing.
What is Lender’s Title Insurance?
Lender’s title insurance, as the name suggests, protects the lender. You must pay for this premium at the closing. It doesn’t benefit you in any way; it only covers the lender up to the amount of the mortgage. This way if someone comes in and stakes claim on the home after you bought it, the lender has insurance coverage to cover legal fees and any potential losses.
Lenders title insurance stays in effect for the entire loan term. If you sell the house or refinance the loan, the current lender’s title insurance becomes null and void. You’ll have to purchase new title insurance for the new lender.
What is Owner’s Title Insurance?
You can buy owner’s title insurance for the amount you paid for the home. The owner’s policy protects you against lawsuits or other issues that affect your homeownership. Some of the most common issues include:
- Errors in the deed
- Mistakes in recording
- Chain of title issues
- Fraud or forgery
- Undisclosed heirs
If there is a lawsuit regarding homeownership, you are the first target, which is why securing an owner’s policy is crucial. It will protect you financially from a lawsuit as well as help you cover the legal fees.
Get Matched with a Lender, Click Here.
Are Both Lenders and Owner’s Policies Required?
Only lender’s title insurance is a requirement if you take out a loan. if you pay cash, you don’t have to take out any title insurance. However, owner’s title insurance is highly recommended whether you have a mortgage or not.
The owner’s policy protects your investment in the home. This is especially important for cash buyers. If there is a large claim against the property and you lose all of your equity, you essentially lose your entire investment in the home.
Who Pays for Lender’s and Owner’s Insurance?
Each state and title companies within the state have different rules, however, in general, buyers pay the lender’s insurance policy and sellers pay the owner’s policy. Of course, buyers can pay for both policies and buyers can get seller assistance with a majority of their closing costs, essentially passing the buck to the seller.
Does Title Insurance Protect Against Liens?
Both owner’s and lender’s title insurance protect against liens. If the lien affects you financially or affects the home’s value, the insurance will protect you. For example, if there’s an unpaid tax lien on the home, the insurance would cover the financial aspect of the lien if the lien existed prior to the title search and was somehow missed.
Both lender’s and owner’s title insurance are important. They protect both the lender’s and your own interest in the property. Even the most thorough title search could miss something that may cause ownership or financial issue down the road.