Are Owner’s and Lender’s Title Insurance Policies Required?

In a typical home buying scenario, a lender’s title insurance policy is required by the lender and owner’s title insurance is optional—but there are benefits to having both. Before you choose to forgo an owner’s policy, explore the benefits of having one so that you can make a fully educated decision. Here, we break it down for you.

What is title insurance?

Before we dig in, let’s quickly recap what title insurance is and the types of policies that are available to you. 

First up, what is title insurance? Title insurance is an insurance policy that can protect you and/or your lender in the event that someone has an interest in your property from the time before you owned it. 

Now, you might be wondering, why would I be held responsible for something that happened to my home before I was the owner? When you buy your home, a seller transfers their legal ownership, or “title” to their home, to you. The transfer is represented by a contract called a “deed” and recorded in the Public Records at the county courthouse where the land is located. 

But, even though you own the property, your ownership is subject to items that were recorded before your deed. Some examples include:

  •  A prior owner had a lien against the property that was not paid in full, so you’re responsible for paying off the amount. 
  •  A prior owner  granted a neighbor the right to use a part of the land through  an easement, so you must continue to permit that use of the land. 
  • If you’re part of a homeowner’s association, restrictive covenants are recorded in the Public Records, and those documents may impact your use of the property.   

But, there are ways to discover these items and protect yourself  from anything that was not disclosed to you at closing. That’s where lender’s and owner’s title insurance comes in. 

An owner’s vs. lender’s title insurance policy: What’s the difference?

Lender’s title insurance policies are usually required any time the transaction includes financing. When a bank loans you money, you sign a note, the promise to repay the money. You also sign a mortgage, the document recorded in the Public Records that allows a bank to foreclose and acquire title to the property in the event that you do not pay the note as promised. 

A lender’s policy protects the lender's monetary interest in your property. It also insures against problems like a prior lien that affects the lender’s priority, a record owner who did not sign the mortgage, or even a forged deed that renders the mortgage unenforceable against the property. 

An owner’s title insurance policy, on the other hand, protects you, the owner. Schedule B of your  policy should disclose all known interests in the property, like easements or homeowner’s associations. Other title matters are covered by the policy, just like the lender’s policy of title insurance. For example, if a contractor hired by the previous owner claims they weren’t paid for work they did, your title insurance policy may cover you.

Is owner’s title insurance optional?

Although owner’s title insurance is technically optional, most people choose to buy it for added protection and peace of mind. If you want to protect your own interest in the property (your equity), it’s a good idea to purchase an owner’s policy in addition to the required lender’s policy. Plus, in many cases, the owner’s and lender’s policies are purchased together, often resulting in a discounted rate. 

For more title industry insights, continue exploring the Spruce Blog.

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