Customers often become confused over the issue of Title Insurance. They often wonder what it is, why it is required, and what is the difference between a Lender’s Policy and an Owner’s Policy.
First, Title Insurance is a policy paid for at the closing which ensures that the Title to the property, that is the ownership of the property, belongs to the stated owner and that there is no other lien on the property outside of the ones that belong to the sellers or current owner and that there are no other parties who could lay claim that they have an ownership interest in the property. When the Title Insurance company reviews the property and the chain of titles (the history of ownership on the property) and they can verify that no other parties can lay claim to the property or enforce a lien on the property, then the title is said to be “clear”. If the Title Company is unable to do this, this is referred to as the property having a “cloud on the title”.
Once the Title Insurance company verifies there is no potential for claims against the property by the new owner or against the lien position of the mortgage lender, the Title Insurance company will issue a Title Insurance Policy (“TIP”). The TIP is the owner and the lenders assurance that the title to the property is clear.
This is where the question of a Lender’s Policy or an Owner’s Policy is needed. A Lender’s Policy is required on all mortgage loans. The amount insured will be for the new loan amount. If in the future someone comes forward to lay claim against the owner’s title to the property, the Title Insurance Company will defend against the claim at no cost to the insured. If the Title Insurance Company is unable to defend the claim, or loses the claim, the Title Insurance Company will pay off the existing lien to the insured lender. A Title Insurance Company may also settle with the claimant for an amount of money as opposed to paying off the existing mortgage as well.
If there is an Owner’s Policy on the property and the above situation occurs, the Title Insurance Company and they are unable to settle with the claimant, they will payoff the existing lien and will reimburse the Owner of the property any equity that they have in the property. If the Owner of the property does not have an Owner’s Title Insurance, any equity they have in the property will be lost. Obviously, this is not a pleasant situation for the Owner!
While an Owner’s Policy is certainly highly recommended for a purchase, it is less clear on a Refinance. If the owner of the property has owned the property for a long time, it may or may not be necessary. However, every situation is different and should be reviewed by a qualified party.
Title Insurance issues can be complex and for all of the possibilities that can occur, it cannot be covered in a short review. Contact your Googain Loan Officer for more information on Title Insurance and how it works.