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Owner's Policy, Lender's Policy: Why Both?
By Barbara Pronin
Much like the mounting paperwork, the costs associated with buying a home can be daunting to many buyers: survey fees...inspection fees...origination fees...recording fees – and that’s before we get to insurance.

Most buyers can understand the need for homeowners and hazard insurance. But when it comes to title insurance, a common question buyers ask their real estate agent is, “Why do I need both an owner’s policy and a lender’s policy?”

The simple truth is that title insurance protects against hidden title hazards that could threaten financial investment in the property – for the mortgage lender as well as for the buyer.

Owner’s title insurance, which lasts as long as the buyer owns the property, protects the new owner against any insured title hazards – that is, any threat to ownership or financial loss due to rights or claims made by others.

Not surprisingly, the mortgage lender, in addition to requiring the buyer to have physical hazard insurance on their new home, requires equal protection against title hazards.

As your buyer should be aware, insuring title begins with a search of public records to determine whether title to the property is clear – that is, among other things:
  • Do deeds, wills and trusts contain incorrect names or wording?
  • Are there outstanding mortgages, judgments, or liens against the property?
  • Is there pending legal action against the property that could affect the buyer?
  • Are all notary acknowledgements are correct?
But even the most careful search of records may not discover the existence of all potential title hazards, such as:
  • A forged signature on the deed
  • An unknown heir of a previous owner who comes forth to claim ownership
  • A document executed under an expired or fabricated power of attorney
  • Mistakes in the public record
Title insurance provides financial protection against such covered title hazards, and the insurer will pay to defend against any attacks on title as insured or pay up to the policy amount to cover the claim - and all for a one-time charge at closing.

Depending on state law and/or local practice, the buyer may pay an additional premium for the owner’s policy or pay a simultaneous amount for the separate lender policy. Some buyers and sellers have been known to split the costs.

In short, while hazard insurance protects against possible future events and charges an annual premium to do so, title insurance protects both buyer and lender against title defects that that already exist, and all for a one-time premium – a premium well worth its relative cost (on average, about 0.4 to 0.7 percent of the purchase price) – all things considered.
 
Barbara Pronin is an award-winning writer based in Orange County, Calif. A former news editor with more than 30 years of experience in journalism and corporate communications, she has specialized in real estate topics for over a decade.

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