If you have recently become a new homeowner, you are likely seeking to determine the most effective way of protecting your residence. A house can sustain damages due to several different events, such as fires, floods, and vandalism. Most insurance companies sell policies that offer protection against these types of incidents. However, there is one type of insurance that is significantly different from most other forms of protection: title insurance. Here is a close look at this subject.
What Is Title Insurance?
Title insurance is a type of indemnity insurance (separate from homeowners’ insurance) designed to shield both homebuyers and lenders from financial loss that arises due to defects in a property’s title (e.g. a deed). A title may be defective for a variety of reasons, including unknown liens and encumbrances, easements, property restrictions, and public record errors. Title insurance is thus different from other forms of insurance because it offers protection against past incidents rather than future claims.
What Is Lender’s Title Insurance?
Lender’s title insurance shields your mortgage lender against issues with the title to your property. This type of insurance is typically required to receive a mortgage loan. If another person says he/she has a claim against your property and sues you, a lender’s title insurance policy will protect your lending institution. This type of policy does not protect your home equity, however.
Why Lender’s Title Insurance Protects Lenders Only
Lender’s title insurance only protects lenders because there exists a separate form of protection for homebuyers called owner’s title insurance. This type of policy shields homeowners against claims related to mechanics liens (i.e. contractors who were not paid for remodeling work completed on the home before you purchased it) or a previous owner’s failure to pay taxes, among other claims. An extended owner’s policy generally protects homebuyers against additional liabilities such as forgeries and encroachments.
Do You Need Lender’s Title Insurance?
Nearly all lenders require borrowers to buy a lender’s title insurance policy in order to shield the bank in the event the seller cannot legally transfer the title of ownership rights. In a general sense, it’s always important for both parties in any real estate agreement to be protected. This generally helps avoid lawsuits from occurring.
What Does A Lender’s Policy Cover?
A mortgage lender’s title insurance policy merely covers the amount of its loan, which is typically not the property’s full value. A lender cannot foreclose on a home unless it receives a title policy. A lender’s policy does not cover claims related to damages caused by storms, fires, theft, or vandalism. It also does not provide flood insurance coverage, which the federal government issues. For this type of protection, you would need to purchase homeowners’ insurance.
How Often Do You Pay For Lender’s Title Insurance?
Unlike most other types of coverage – which are often paid on an annual or monthly basis – title insurance is a one-time payment, usually paid at closing. A lender’s title insurance policy is valid for as long as the loan exists, while an owner’s policy is valid as long as the homebuyer owns the property. Certain states offer the added benefit of increasing coverage each year to account for potential appreciation. However, if the borrower acquires a new loan, the lender must typically pay another title premium.
The cost of title insurance generally varies based on several factors, including the value of a property. If a homeowner decides to re-sell his/her property within a few years, this person may apply for title insurance binder coverage. This serves as an addition to a policy and is typically valid for two years.
Get Your Lender’s Title Insurance From The Pros
Reach out to the professionals at Mathis Title Company in Fairfax, Virginia, for more information on lender’s title insurance and why it is important. We are dedicated to providing a wide variety of real estate settlement services and legal advice to buyers, sellers, and lenders.
During the sale and purchase of a home, Mathis will hold the funds being transferred in an escrow account prior to title transfer and closing. Once the title order has been approved, our agents can begin a title search and the homeowner is provided a preliminary report to evaluate and approve. We work with several trusted underwriting companies to issue title insurance policies. Our extensive legal background helps us ensure that a title is clean (i.e. free of defects such as liens, easements, and encumbrances) before a transfer of ownership occurs.