When purchasing a home or refinancing a mortgage, title insurance isn’t the first thing that comes to the mind of homeowners. Nevertheless, they still need to know what it is and how it protects both them and their lender from fraud and other problems.
Two Types of Title Insurance Policies
Title insurance policies protect homebuyers and lenders against loss arising from problems connected to the title to the property. When homeowners obtain a mortgage, they are required to have a title insurance policy for at least the value of the home loan.
When purchasing title insurance, homebuyers will usually need two types of policies:
- Lender’s policy
- Owner’s policy
These policies protect buyers and lenders against the following on the property title:
- Fraud or Forgery
- Undisclosed Heirs
- Spousal claims
The lender’s policy protects the lender’s interest in the property, and is based on the loan amount. It is separate from the owner’s policy in that lenders need to be able to foreclose on a home and get back their principle and interest should the loan become non-performing.
The owner’s policy protects the home buyer and covers the amount of the property’s purchase price. Homeowners must have title insurance until the loan is completely paid off. When home buyers close on their new home, they will pay a one-time fee to have the title insurance company to do an extensive search of public records for claims or losses on the property. This search will tell home buyers if the seller really owns the property and has the right to sell it.
Sometimes even a comprehensive search of public records may not be able to find title problems, which is why homeowners are required to purchase title insurance. The cost of title insurance is regulated in many states and averages about the same from company to company. Ask your lender to see if fees are regulated in your area.