Title insurance provides protection to both property owners and lenders against potential title defects or claims. Two types of policies are commonly involved: owner’s title insurance and lender’s title insurance. While they serve different purposes, understanding the distinction between the two is important when you are buying a home:
Owner’s Title Policy:
An owner’s title policy, also known as an owner’s policy or an owner’s title insurance, is a policy designed to protect the property owner’s interests. It is typically purchased by the seller during a real estate transaction and provides coverage for the full purchase price of the property.
The primary purpose of an owner’s title policy is to safeguard the property owner against any unknown title defects or claims that may arise before the purchase. These defects or claims can include issues like undisclosed liens, encumbrances, errors in public records, fraud, or even undisclosed heirs with a potential ownership interest.
Once an owner’s title policy is obtained, the title insurance company conducts a thorough search of public records to identify any potential risks or defects in the property’s title. If any issues are discovered, the insurance company may either exclude them from coverage or work to resolve them before issuing the policy. In the event of a covered claim, the owner’s title insurance policy provides financial protection to the property owner, covering legal expenses and potential losses up to the policy’s face value.
It’s important to note that an owner’s title policy is typically a one-time payment made during the property purchase and remains in effect for as long as the property owner or their heirs have an interest in the property. This means that even if the property is sold, the original owner’s title policy remains in force to protect the buyer’s interests during their ownership.
Lender’s Title Policy:
While an owner’s title policy protects the property owner, a lender’s title policy, also known as a loan policy or lender’s title insurance, safeguards the lender’s investment in the property. When a property is being financed through a mortgage or other loan, the lender will typically require a lender’s title policy to be issued.
The lender’s title policy is based on the loan amount and protects the lender against any title defects or claims that may jeopardize their lien position or the validity of the mortgage. It ensures that the lender’s investment in the property is secure and that they have a valid and enforceable lien.
Similar to the owner’s title policy, the lender’s title policy involves a thorough title search to identify potential issues. However, the coverage is focused on protecting the lender’s interests rather than the property owner’s. If a covered title claim arises, the lender’s title policy will cover the lender’s losses up to the amount of the loan, including legal expenses.
It’s important to note that a lender’s title policy is typically paid for by the borrower as part of the closing costs. The borrower is responsible for purchasing this policy to protect the lender’s interest in the property. Unlike the owner’s title policy, the lender’s title policy does not protect the borrower’s equity or ownership rights in the property. To safeguard their interests, the property owner should obtain their own owner’s title policy.