Title Insurance: Owner’s vs. Lender’s Policies

For many, title insurance is a murky topic. Homebuyers know that they need it, although they may be uncertain as to why. In this article, we’ll clear up any confusion and explain why there are two types of title insurance.

What Is Title?

Title is the right to occupy and use the space of a property. It’s what proves you have purchased or otherwise taken ownership of a building or land. Buying real estate is a little different than buying, say, a camera. When you go to the store and pay for a camera, you do not have to worry about someone else claiming its ownership. However, real property may be entangled by claims and rights asserted by others. These claims may compromise your ability to use and enjoy your property. The solution to this potential problem is title insurance.

Title Insurance

Title insurance is issued by title companies after they perform title searches. Its purpose is to indemnify the policyholder from financial loss if problems arise regarding a property’s title. What kind of problems? Well, let’s say you buy a nice home in the neighborhood of your choice, not knowing that the local government has put a lien on the property because the owner has not paid property taxes for 12 years. It is the job of the title company to thoroughly research the property you want to buy and insure it is free of claims, liens, disputes and so forth. Title insurance can protect the policyholder against financial loss from certain covered title defects that existed before the policy date, subject to the policy’s terms, exclusions, exceptions, and coverage amount. If a covered claim arises, the insurer may defend the claim or provide other benefits as required by the policy. Review the policy for its exclusions and exceptions.

Title companies go about their jobs by examining various public documents, including federal and state records, deeds, encumbrances, court judgements, tax records and zoning laws. They will even check whether the property is in a flood zone. Title insurance is backward facing: When a title policy is issued, you are protected from the effects of past transactional events, not future events. In other words, it will not protect you if someone puts a lien on the property a day after the closing.

What Title Insurance Isn’t

Homeowner’s insurance is separate from title insurance and generally covers certain future physical losses to the home and personal property, subject to its policy terms. Some title insurers offer enhanced owner’s title policies with additional covered risks; coverage varies by policy. Flood insurance is also separate coverage and may be available through the National Flood Insurance Program or private insurers. Homeowner’s insurance is future-facing: You’re covered as long as you pay your premiums.

Oh yes, if you put down less than 20 percent when you buy your home, your lender will require you to take out mortgage insurance, which partially protects the lender if you default on your payments. When you can drop mortgage insurance depends on the program. On a conventional loan the Homeowners Protection Act gives you the right to request cancellation once your balance reaches 80% of the home’s original value, and requires automatic termination at 78% if you are current on payments. FHA is different: on most loans with a case number dated on or after June 3, 2013, annual mortgage insurance lasts 11 years if you put at least 10% down, and for the full term of the loan if you put down less — which is why refinancing out of FHA is often the only way off it.

Lender’s Title Insurance

For a financed purchase, the lender will commonly require a lender’s title policy. Who pays the premium can vary by the purchase agreement, local custom, and the terms of the transaction. This insurance covers your lender’s investment in the property, not the total value. This insurance does not protect buyers. Your mortgage lender will not close your loan unless it receives a title policy.

Owner’s Title Insurance

If you want to protect the full value of your property from title claims, you want owner’s title insurance. You have the opportunity to buy this at closing for a one-time premium. This policy can protect you and your heirs against certain covered title defects while you or they have an interest in the property, subject to the policy’s terms, exclusions, exceptions, and coverage amount.

Owner’s title insurance may help if a title issue arises when you eventually sell or refinance your property. It does not ensure that a sale or refinance will proceed. For a covered claim, the insurer may defend the claim or provide other benefits as required by the policy. Review the policy for its exclusions and exceptions.

The defects that matter most are the ones nobody could have spotted at closing: a deed forged decades ago, an heir who was never notified of an estate sale, a lien recorded against a previous owner, or a foreclosure somewhere in the chain of title that was not carried out properly. Any one of them can surface years later — typically at the moment you are trying to sell.

Owner’s title insurance policy does not assure that a later sale will proceed; coverage for a title issue depends on the policy’s covered risks, exclusions, exceptions, and other terms.

Owner’s title insurance is a one-time premium paid at closing, and on a typical purchase it lands in the neighborhood of 0.5% of the price. Several states file or regulate title rates, so where you live the price may not be negotiable at all; where it is not regulated, it is worth comparing. If you are buying the lender’s policy and an owner’s policy together, ask for the simultaneous-issue rate, which is normally far less than buying the two separately.