Owner's Policy, Lender's Policy: Why Both?

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By Barbara Pronin

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 financial loss from defects in title to real property – for the mortgage lender as well as for the buyers.

Owner’s title insurance, which in some policies can literally last forever, protects the new owners against specific covered risks as set out in the policy, i.e. certain threats to ownership or financial loss due to rights or claims made by others.

Not surprisingly, mortgage lenders, in addition to requiring the buyers to have physical hazard insurance on their new home, also require protection against title claims that may arise after title has been transferred to the new owners.

As all buyers should be aware, insuring title begins with a search of public records to determine that title to the property is insurable – that, among other things includes:

Deeds contain no incorrect names or wording
Any outstanding mortgages, judgments, or liens against the property that will need to be paid at the close of escrow
Any pending legal actions against the property that could affect the buyers
Any defects on the title that need to be addressed

But even the most careful search of records may not discover the existence of all potential title challenges, 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 all such covered risks, and the insurer will pay to defend against attacks on title as stipulated in the policy, all for a one-time premium charged at closing.

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 already exist or arise, 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).

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.

This material is not intended to be relied upon as a statement of the law, and is not to be construed as legal, tax or investment advice. You are encouraged to consult your legal, tax or investment professional for specific advice. The material is meant for general illustration and/or informational purposes only. Although the information has been gathered from sources believed to be reliable, no representation is made as to its accuracy.

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