Purchasing a new home is an exciting experience. Before you can close, however, the previous owner must hand over the title, which is an official record that proves you hold ownership of the home, and have the right to sell it.
But if you dig further into the home’s history, it’s possible that you could run into a title defect, like unpaid property taxes, an existing lien, or even a clerical error. Issues with your title can put your legal rights to the home in jeopardy. Fortunately, there are certain types of insurance that can protect you in this situation.
What is Lender’s Title Insurance?
Most homeowners take out a mortgage to finance a newly-purchased property. If your home’s title has a defect, though, it can put your lender’s investment at risk. For example, if a bank loaned you $200,000 to buy a house and a title defect forces you to give up the home, your lender might never get their money back.
As a result, lender’s title insurance is typically required whenever you take out a new mortgage, or refinance an existing one. This type of insurance protects your lender’s investment in the event that your home has a faulty title. The cost of lender’s title insurance is usually a one-time fee that you will pay along with the other closing costs.
If you’re wondering where to purchase lender’s title insurance, your mortgage provider will probably recommend an insurance company. However, home buyers are allowed to shop around and choose their own insurance carrier. It’s a good idea to get quotes from a few different companies because it could help bring the price down.
What is Owner’s Title Insurance?
You can think of owner’s title insurance as the opposite of lender’s title insurance. In the event of a title dispute, owner’s title insurance protects you, the homeowner, in lawsuits related to bad titles. This policy can cover your legal defense, a court settlement, and most importantly, it protects your equity in the home.
Unlike lender’s title insurance, owner’s title insurance is not required when you take out a mortgage. In most cases, you are responsible for paying the premium, although the seller may cover the cost in some states. Additionally, this type of insurance offers no protection for the lender.
As you might imagine, you can’t purchase owner’s title insurance from companies that sell auto or home insurance. Your mortgage company should be able to provide a few companies that sell this type of insurance. Because it’s not required, you can choose to drop this coverage at any point, even if your loan is not fully paid off.
Difference Between Owner's Title Insurance and Lender's Title Insurance
Owner’s title insurance and lender’s title insurance are related, but they have a number of differences. The first major difference is who gets coverage. Lender’s title insurance only protects the lender that supplies the loan, whereas owner’s title insurance only protects the homeowner.
In addition, owner’s title insurance is never required. Homeowners can choose to purchase this type of insurance when they take out a mortgage. On the other hand, lender’s title insurance is almost always a requirement when you take out a home loan. There’s usually no way to avoid paying for lender’s title insurance if you need a mortgage.
Another difference is who pays for these types of insurance. With lender’s title insurance, the homeowner borrowing the money is responsible for the cost. However, in certain states, owner’s title insurance is paid for by the seller, or the cost might be split between the seller and the buyer. In other places, the buyer pays for the full amount.
Do I Need Both?
If you’re planning to take out a mortgage, you might be wondering if you need both owner’s title insurance and lender’s title insurance. While you don’t need to purchase both, you will most likely have to buy lender’s title insurance as a condition of your loan. Even though lender’s title insurance offers no protection for homeowners, most mortgage companies require it.
On the other hand, you aren’t required to buy owner’s title insurance. This is completely optional. And if you live in a state where the seller is responsible for the cost, it’s worth getting.
Owner’s title insurance can be a life-saver if you find out that your home’s title has errors or defects. Without this type of insurance, you would be financially responsible for your legal defense if you went to court. Plus, you could lose equity in your home without coverage.
Even if you’ve been in your home for many years, title issues can arise at any time, complicating your legal ability to retain ownership of the house.