What is the primary difference between an owner's title insurance policy and a lender's title insurance policy?
An owner's policy insures the buyer's ownership interest for as long as the buyer owns the property. A lender's policy insures the lender's security interest in the property and decreases as the loan balance is paid down. The lender's policy protects only the lender.
Key Takeaways
- An owner's policy insures the buyer's ownership interest for as long as the buyer owns the property.
- A lender's policy insures the lender's security interest in the property and decreases as the loan balance is paid down.
- The lender's policy protects only the lender.
Transfer of Property on the Real Estate Exam
Title insurance is standard in all three states and protects against hidden title defects. Understanding the two types ensures buyers understand their coverage and lenders know they are protected. This is heavily tested because it affects closing costs and who pays for what.
Understanding Transfer of Property: Key Concepts
What It Means
Title insurance is a contract protecting the holder against loss due to defects in the title to real property. Unlike other insurance, title insurance focuses on past events and existing defects rather than future occurrences. The title insurance company will search the property's history, issue a preliminary report, and then issue a policy after closing.
Rights and Protections
An owner's title insurance policy protects the buyer's equity in the property for as long as the buyer owns it. The coverage amount is the purchase price, and this amount does not decrease over time. The policy protects against claims by previous owners, liens that were not discovered during title search, forged deeds in the chain of title, incorrect legal descriptions, and other title defects. The policy is issued for a one-time premium paid at closing.
Rights and Protections
A lender's title insurance policy (also called a mortgagee's policy) protects the lender's security interest in the property. The coverage amount equals the loan amount and decreases as the borrower pays down the mortgage. The lender's policy protects the lender against loss if title defects affect the lender's ability to foreclose or recover the secured amount. Most lenders require a lender's policy as a condition of the mortgage.
Both policies typically exclude certain items from coverage: defects the owner was aware of before closing, violations of deed restrictions or zoning laws that are visible, and claims by parties in actual possession of the property. The title company will not cover defects they discovered and excluded from the policy. The insured party (buyer or lender) can file a claim if a covered title defect arises.