What is title insurance?
Two types of title insurance are offered: (1) a lender’s policy, which is required by most mortgage lenders for the amount of their loan. (2) an owner’s policy, which protects the owner’s equity in the property. As the lender’s policy coverage decreases when the mortgage is paid down, the owner’s policy coverage increases. To illustrate, suppose you buy a $100,000.00 home and pay a $20,000.00 cash down payment. The mortgage lender will insist on a lender’s policy for the $80,000.00 mortgage. If you buy an optional owner’s policy to protect your $20,000.00 equity, as you pay down the loan your owner’s title policy protection grows. Also in most cases, when an insured’s title is challenged, the title company will defend the insured and cover the costs of the defense as well as the costs of clearing title.
Lenders are well aware of the advantages of title insurance and require a policy that is paid for by the borrower. A lender’s policy has thus become a routine cost of closing for the borrower. Unfortunately, a borrower/purchaser looks on an owner’s policy as just one more closing expense at a time when money is tight. Since the owner’s policy is an option, a purchaser will often choose to pass up the protection it affords in favor of saving some money. The purchaser is gambling that no title problems will be discovered. Often, that is the case, but there are exceptions.
The following are a few examples of title problems that can occur: (1) Several months before a closing the property owner was sued and a judgment was obtained. A judgment lien was recorded but the Town Clerk misindexed the judgment lien so the lien was not found by the title searcher. Several months after the property was sold, the creditor discovered the problem and had the Town Clerk correct it. The lien was now in the purchaser’s chain of title. Without the protection of an owner’s policy, the purchasers would have to either pay the lien before they could sell the property, or even pay the lien earlier if the judgment creditor decided to foreclose on the judgment lien.
Another example: purchaser’s bought a newly constructed house. Several weeks after the closing, they were served with a notice of a mechanics lien. The workman filing the lien claimed he had not been paid and had not signed or authorized the signing of a lien waiver. Without an owner’s policy, the purchaser would have to defend a foreclosure action by the contractor or pay the lien to prevent foreclosure. Title insurance would help the new owner.
Many borrowers believe that they receive protection from the lender’s policy. It is important to understand that a lender’s policy only compensates the lender in the event of loss and that compensation is limited to the actual loss insured by the lender. The borrower/purchaser receives no compensation unless they have purchased on owner’s policy.
The financial burden that closing costs place on today’s home purchaser is great, nevertheless, every purchaser should be advised of the protection an owner’s policy provides and should discuss the cost and benefits of an owner’s policy with their real estate attorney.
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