Navigating the world of real estate can be like trying to decipher a foreign language. However, understanding the intricacies, especially when it comes to title insurance, is crucial for property buyers. In this guide, we will explore the differences between lender’s title insurance and both types of owner’s title insurance. We will help you decipher which type of insurance you may require, what you should have, and why you might need both types of insurance.
What is Title Insurance?
Before diving into the differences, let us define title insurance. This is an indemnity policy that protects against monetary loss from defects in title to real property and from the invalidity or unenforceability of mortgage loans. The simplest example is that if someone claims ownership of your property due to an issue in the title history, then your title insurance provides a safety net.
Lender’s Title Insurance Explained
Lender’s title insurance, also known as a loan policy, is usually required by the lender when you borrow money from them to the extent of the loan value, not based upon the purchase price. This policy only protects the lender’s interests in the property should a legal problem arise with the title. It does not protect the buyer’s equity in the property. If a claim does arise against the property, the owner is the first party responsible, rather than the lender. While you would have purchased the lender’s title policy for the lender, such policy only covers claims to the extent that the claim affects the lender’s loan. An owner’s equity must be protected either out of pocket, or by purchasing an owner’s title policy (read the two types below). A lender’s title policy is purchased one time per loan. If you pay off the loan, the policy goes away. If you refinance the property, and get a new loan, then you will need a new lender’s title policy.
Why Do Lenders Require It?
Lenders take a significant risk when they provide you with a mortgage. They want the assurance that the property they are financing is free of hidden liens, encumbrances, or other defects in the title – so should you. The lender’s title insurance provides this assurance and protects their investment in the property. Your lender wants to insure that should a claim be brought against the collateral for any issues that occurred prior to your purchase, then they are fully protected up to the outstanding loan amount. The lender does not want to be out of pocket.
Owner’s Title Insurance Explained
An Owner’s Title Insurance Policy protects the buyer’s investment in the property. It protects the entire contract price. While it is often optional, it’s highly recommended. Owner’s title insurance provides the assurance that your title company will stand behind you—monetarily and legally—if a covered title problem arises after you buy your home.
There are two time periods that come into play with owner’s title insurance – before and after your purchase. The before purchase period is any issues that might arise before you purchase your property, whereas the after-purchase period is any issues that might arise after you purchase your property.
There are two types of owner’s title policies – “Owners” (also known as Basic, ALTA and Standard) and homeowner’s “Eagle” (also known as Enhanced). The basic owner’s title insurance policy protects you against certain minimal losses that arise only before you bought the property, whereas a homeowner’s Enhanced Eagle Title Policy protects you against more losses that arise both before and after you purchased the property. A homeowner’s Enhanced Eagle Title Policy covers mechanic’s liens, post-purchase forgeries, and post-policy inflation coverage, none of which are covered by a basic owner’s policy.
It is always recommended that you purchase the Enhanced Eagle Policy.
Why Is Owner’s Insurance Recommended?
A title company conducts a thorough investigation into the prior ownership of a property. It verifies that the seller is the correct owner in the public land records. A seller must have the ability to sell the property. A seller must have marketable title, so the title search determines what issues need to be resolved by the seller prior to sale. The title search finds those liens or encumbrances that may need to be released or satisfied at or prior to closing, or any other defects or concerns.
Even the most diligent title search cannot predict when a long-lost heir or previously undisclosed lienholder may come forward with a claim to the property. Nobody knows the next victim of title fraud. Sometimes, there are clerical errors on legal documents that ended up getting recorded that years later the court voided. Someone else may own an interest in the property. Documents could be improperly signed or forged in the land records. There also may be unmarketable title.
Title insurance for a purchaser is a cost that covers hidden title issues and ensures your right to the property. The price difference between a basic Standard policy and the Enhanced Eagle policies is about 20%, so the cost is so little it is worth the investment.
Do You Need Both?
In most real estate transactions, you are required to purchase a lender’s policy if you are obtaining a mortgage. If there is a claim against the property, the lender will look to you as being responsible for the entire claim, but they will be covered to the extent of their loan amount outstanding. Therefore, it would behoove a buyer to purchase a title policy to insure themself fully against the entire value of the property so that they are covered for their own equity, but also so that their policy will be compatible with the lender’s title policy. While an owner’s title policy is optional, it provides protection against potential legal and financial title discrepancies, and it is a smart investment.
We have found that nearly all lenders require a lender’s title insurance policy and that most buyers decide to purchase an Enhanced Eagle Owner’s Title Policy.
For further inquiries or guidance tailored to your unique situation, do not hesitate to reach out to our experienced team. Protecting your property rights is our top priority.