One of the many costs associated with closing your loan is title insurance. In short, a title insurance policy insures against loss resulting from title defects, both known and unknown, at the time of the sale or refinance of the subject property. Title defects can include a multitude of problems, but some common examples include:
- A person in bankruptcy (who has no authority to sign the deed) conveys the property to a third party
- A deed is recorded incorrectly (e.g., no legal description)
- A deed is conveyed with a forged signature
- Local or state taxes for a property weren’t paid by a previous owner
Title insurance professionals make sure your title is cleared of all know defects at the time you take title. However, different insurance policies are issued for lenders and owners.
Owner’s Title Policy
An owner’s title policy is issued for the amount of the real estate purchase. The policy is only issued once, and remains in effect for as long as you or your heirs have an interest in the property. Owner’s title insurance fully protects the buyer in the instance of a title problem arising after you buy your home.
Lender’s Title Policy
Title insurance for the lender (aka a mortgagee policy) is almost always required by the lender. Lenders want to make sure the property is clear to sell in case the borrower defaults on their loan. Even though the borrower is required to pay for the lender’s policy at closing, it ONLY insures the lender. The lender’s policy is for the amount of the loan, not for the entire purchase price of the property.
While owner’s title insurance is a one-time purchase for the property, the lender’s policy is only good for the life of the loan with the lender. In other words, if you refinance with a new lender, that new lender will require you to purchase a new title policy. However, your owner’s policy will not need to be re-issued at refinance.
To Buy or Not to Buy
While purchasing an owner’s title policy is optional, you must be willing to assume a certain amount of risk without it. For example, if you purchase a home for $200,000 and put 20% down, your loan amount will be $160,000. Unless you have an owner’s title policy, you are assuming a $40,000 risk. The lender will be protected for $160,000, but the first $40,000 in loss must be shouldered by the homeowner. If you feel you can assume that kind of loss and remain financially solvent, then save your money. Otherwise, an owner’s title policy can be considered a wise investment.
