By Deborah Kearns
Title insurance helps insure the marketability of properties in a real estate transaction. Like most types of insurance, we purchase coverage hoping we’ll never need it, but we’re grateful it’s there when we do.
In a home purchase, there are two types of title insurance policies that can be purchased: an Owner’s Policy and a Loan Policy. The Know Before You Owe (aka “TRID”) rule has been fully implemented and the Owner’s Title Policy is now required to be listed as optional on the Loan Estimate and Closing Disclosure. The homebuyer typically pays for both policies but in some areas it is customary for the seller to pay. Each has different functions and protects two distinct interests in a transaction.
Let’s first look at an Owner’s Policy. We believe this is critical for homebuyers because it protects them if a title issue arises during or after a home purchase. This type of coverage is issued in the amount equal to the home’s purchase price, and borrowers pay a one-time fee at closing. An Owner’s Policy protects borrowers for as long as they have an interest in the property.
If something goes amiss with the title – undisclosed heirs, oversight in records research, forgery, or errors or omissions in deeds – the last thing a homebuyer wants is to be caught in the middle of a legal battle. An Owner’s Policy makes the insurance company responsible – both financially and legally – for any covered claims against the homebuyer as long as he or she purchased the Owner’s Policy at closing.
On the other hand, a Loan Policy protects a lender’s interests and is based on the dollar amount someone is borrowing from the bank – not on the full value of the property. The policy amount gradually decreases as the loan is paid down and is dissolved completely once the loan is paid off.
The key distinction between the Loan Policy and the Owner’s Policy is the Loan Policy is coverage for the lender; it does not protect the borrower in any way. Homebuyers are typically responsible for paying for the Loan Policy even though they don’t benefit from it as a condition of obtaining the loan.
It’s important to educate your clients about these two types of policies in clear terms, so that there are no surprises. As stated earlier, the Know Before You Owe (aka “TRID”) rule has been fully implemented and the Owner’s Title Policy is now required to be listed as optional on the Loan Estimate and Closing Disclosure. So it’s a smart idea to assure that your client, the homebuyers, have the protection an owner’s policy provides in case a title issues comes up and not assume they are covered because they paid for a lender’s title policy.
Deborah Kearns is an award-winning writer based in Denver with more than a decade of experience in corporate communications and news journalism. She has covered the real estate industry for more than seven years.