Owner’s Policy vs. Lender’s Policy

What is title insurance?

Before understanding “owner’s policy vs. lender’s policy,” it’s important to first have a general understanding of title insurance. When someone buys or sells property, a record of the sale commonly known as the “Deed” is recorded in public records. Along with the sale being recorded, other events that may affect the sale of the house are also collected. This may include any liens or levies on the property.

When property is purchased, a title company will perform a title search of the Public Records where the property is located to determine if there are any prior issues that may affect the ownership of the property. The title company will then try to accurately resolve any problems that arise. (However, several types of issues can be difficult to uncover.) Upon completion of the requirements to transfer “free and clear title” to the property, the title company will then provide title insurance in order to safeguard the buyer from any issues that may come forward later down the road. When the buyer finances the purchase, a mortgage is recorded and, as mentioned above, there are two policies provided in the sale of a home — owner’s and lender’s (also called a loan policy).

What is the difference between the owner’s policy and the lender’s policy?

The biggest difference between the two policies is simply regarding the protected entities. Each policy provides protection for only one side of the real estate transaction. The owner’s policy protects the new owner of the property from any past discrepancies on the title of the home, while the lender’s policy protects the entity handling the financial loan for the mortgage.
The owner’s policy of title insurance covers the new buyer/owner for the purchase price of their newly acquired property, and the lender’s policy covers the lender for their loan amount — ensuring the financial interests of the loan company are given first claim on any future issues. The other major difference is the duration of the policy. The owner’s policy stays in effect as long as the owner’s name is on the title, providing a sense of security for the owner when making such a large purchase. The loan policy gradually diminishes as payments are made and disappears entirely once the mortgage is fully paid off.

Is owner’s title insurance optional? Is owner’s title insurance worth it?

To slash some closing costs, it can be tempting to bypass owner’s title insurance. Many wonder, “Should I get owner’s title insurance?” There are strong reasons to answer “yes” to this question. While in some instances title insurance is optional, most would strongly advise a new homeowner purchase an owner’s policy. Lenders require title insurance, as it protects the lender from any potential title problem.

What does an owner’s policy cover?

Though owner’s insurance doesn’t cover any issues created by the new owner, it does cover the costs of paying off any potential lawsuits from an undiscovered person who is claiming a right to the property or an unknown lien against the property. It even provides protection for those who may unknowingly purchase a home that contained a forged deed from a seller who never even legally owned the home. It even protects from former contractors who were not paid in full by the previous owners for work done on the property. Owner’s insurance can give a new buyer a sense of peace and even protects the potential of the home being sold again in the future.
Find a trusted title company.

For a small percentage of the cost of the home, as a one-time fee included within closing costs, any person entering into such a large investment should highly consider finding a trusted company to provide title insurance. The likelihood of a problem arising after the home is purchased may seem small, but the consequences are enormous and can threaten a new owner’s rights to continue living on the property and sell it in the future.