Your closing costs might include two types of title insurance policies, but do you know how these policies differ?
If youve ever mortgaged a home, chances are you were required to purchase a title insurance policy. This lenders policy (often called a loan policy) is required by most lending institutions as a way to insure their security interest in the property. This policy protects the bank or other lending institution for as long as they maintain an interest in the property (typically until your mortgage is paid off).
However, as a buyer, you also want to protect your investment — and the ownership rights that come with it. This is why its wise to purchase an owners policy of title insurance, which will protect your rights as the homeowner, generally for as long as you or your heirs have an interest in the property.
Both title insurance policies not only pay valid claims and legal fees to defend against hidden title issues, but also help to decrease ownership risks by providing a thorough title search prior to the issuance of either policy.
There are various customs regarding the purchase of title insurance. In some areas of the country, it is customary for the seller to purchase the owners policy for the buyer, whereas in other areas the buyer purchases this important protection.
If youre considering refinancing your mortgage, you may be surprised to see that you are required to purchase a new lenders policy of title insurance. This is because a lenders policy only provides coverage for the life of a loan. When a home is refinanced, the life of one loan ends and another begins. Thus, a new lenders policy for title is required. Because an owners policy provides coverage, generally for as long as you or your heirs hold an interest in the property, there is no need to purchase a new owners policy when refinancing.
Buying a home is likely one of the biggest financial decisions you’ll ever make. Along with the excitement of homeownership comes the responsibility of protecting your investment. One important but often overlooked way to safeguard your interest as a homebuyer is with a loan policy of title insurance.
What Is A Loan Policy Of Title Insurance?
A loan policy of title insurance is an insurance policy that protects the lender’s financial interest if issues arise regarding the legal title of the property. Title issues may include undisclosed liens, improper transfer of deed, forgery, or other defects that could affect the new owner’s rights to the property.
The loan policy covers the lender up to the amount of the mortgage loan and lasts for as long as the mortgage is in effect. It ensures the lender can recover their investment if title defects surface. While optional for the borrower, a lender will almost always require a loan policy as a condition of approving the mortgage loan.
How Does A Loan Policy Of Title Insurance Work?
Here are the key details of how a loan policy functions:
- Ordered by the lender but paid for by the borrower as part of closing costs
- Provides coverage up to the amount of the mortgage
- Protects against defects that could affect legal claim to the property
- Covers losses incurred by lender due to title problems
- Remains in effect for life of the loan
- One-time premium paid at closing
Before issuing the policy the title company will research public records related to the property title. This search aims to identify any problems that could affect the new owner’s rights.
If any covered title defects do arise after closing, the title company will pay to defend the lender against legal claims. They will also reimburse covered losses up to the policy limits.
What Does A Loan Policy Of Title Insurance Protect Against?
A loan policy protects the lender against covered title defects such as
- Undisclosed liens against the property
- Improper deed transfers
- Incorrect notarizations on closing documents
- Undisclosed easements or right of ways
- Boundary or survey disputes
- Pending legal action against the property or previous owners
- Unknown errors in public records
- Fraudulent title transfers
- Claims from undisclosed heirs
- Forged documents
Without loan policy protection, any of these issues could leave the lender at risk of losing their investment in the property.
Does The Owner Need Title Insurance Too?
While necessary for securing financing, a loan policy only covers the lender’s interest in the property. The borrower/owner is not covered and could be liable for losses if title problems surface.
To protect your own investment as the property owner, it’s highly recommended you purchase an owner’s title insurance policy at closing. This optional coverage shields you from direct losses in the event of a title dispute.
How Much Does Loan Policy Of Title Insurance Cost?
Loan policy premiums vary by state but generally range from $700 to $2000. The exact rate depends on the property value and location. Title insurance rates are filed and regulated in most states.
Borrowers can save on the total cost by purchasing a simultaneous-issue discount when buying both an owner’s and a loan policy from the same insurer. This discounted combo rate helps lower overall closing expenses.
Key Takeaways
- A loan policy of title insurance protects the lender’s financial interest in your property.
- It covers losses if title defects surface that affect legal claim to the property.
- The one-time premium is paid by you at closing but benefits the lender.
- Owner’s title insurance provides coverage for the borrower/owner.
- Loan policy rates range from $700 to $2000 depending on property value and location.
Protecting the lender through a loan policy is a key part of any mortgage transaction. Understanding how this coverage works and your options as the owner are important first steps to safeguarding your new home purchase.
The Title Search Process
Do you know what it really takes to properly insure the title to your property? Read More ›
10 Common Title Problems
Title problems can surface after you close on your home and affect your ownership rights. Read More ›
Do You Need An Owner’s Title Insurance Policy For Your Home?
FAQ
What is the loan policy?
What is the difference between an owner’s policy and a loan policy?
What is a title insurance policy to protect the lender called?
What is the coverage afforded by an owner’s title insurance policy?
What is a lender’s title insurance policy?
When securing a mortgage, lenders typically require borrowers to obtain a lender’s title insurance policy, also known as a loan policy. This protects the lender in the event of property ownership claims. Often, the lender chooses or recommends a title insurance company for you, and includes their fee on your loan estimate.
Should I buy a title insurance policy with a loan?
That’s why it’s wise to purchase an owner’s policy of title insurance in conjunction with the loan policy your mortgage lender will require you to purchase. The loan policy insures the lender against covered title defects up to the amount of the insurance, while an owner’s policy protects your interest in the property.
What’s the difference between a title insurance policy and a loan policy?
The loan policy insures the lender against covered title defects up to the amount of the insurance, while an owner’s policy protects your interest in the property. Learn more about both title insurance policies and which helps to protect your interests. Your lender demands protection; you should too.
What is a mortgage title insurance policy?
A mortgage title insurance policy is a type of title insurance that protects the financial interests of the lender. It ensures that the lender has the top claim on the property above any other liens.