How Many Title Policies Are Typically Issued at a Closing?
Uncover the distinct title policies commonly issued at closing, protecting the unique interests of property owners and lenders.
Title insurance protects against financial losses stemming from issues with a property’s ownership history. This type of insurance differs from other policies, such as homeowner’s insurance, because it addresses past events rather than future occurrences like fire or theft. Before a policy is issued, title companies conduct a thorough examination of public records to identify and resolve any existing liens, claims, or encumbrances before the property’s title is transferred. It ensures clear ownership rights and protects against complications from prior title defects.
Understanding the Primary Policies
At a real estate closing, two primary types of title policies are involved: the Owner’s Title Policy and the Lender’s Title Policy. These policies protect different parties. Each policy is a one-time fee paid at closing, unlike other insurance products that require ongoing payments.
The Owner’s Title Policy is designed to protect the buyer. This policy safeguards their equity and investment against title defects that existed before the purchase. Examples of such defects include undisclosed heirs, forged documents, unreleased liens, or errors in public records. The coverage remains in effect for as long as the buyer or their heirs maintain an interest in the property.
The Lender’s Title Policy protects the mortgage lender’s financial interest. Lenders require borrowers to purchase this policy to obtain a loan. This policy ensures the validity and priority of the lender’s mortgage lien, protecting their investment against title claims. The amount of coverage for a Lender’s Policy is typically based on the loan amount and decreases as the mortgage is paid down.
Distinguishing Coverage and Purpose
Two distinct title policies are issued because the interests of the property owner and the mortgage lender are not identical. Each policy is tailored to address the unique risks faced by its beneficiary, as one policy cannot adequately protect both parties.
The Owner’s Title Policy protects the buyer’s ownership rights and equity. If a covered title defect arises (e.g., an undiscovered prior mortgage or an easement), this policy helps the owner avoid financial impact. It provides legal defense against claims challenging the owner’s title and covers financial losses up to the policy’s value.
The Lender’s Title Policy protects the lender’s financial stake, which is the outstanding loan amount. It ensures the lender’s ability to recover their investment if a title problem affects their lien. For instance, if an undisclosed lien surfaces that takes priority over the mortgage, the Lender’s Policy protects the lender from potential losses. This policy secures their collateral and ensures their ability to foreclose if necessary, free from prior claims.
Common Scenarios and Financial Considerations
In most real estate transactions involving a mortgage, both an Owner’s Title Policy and a Lender’s Title Policy are issued. This is the standard practice when a buyer finances a property purchase. The lender mandates their policy to protect their loan, and the buyer often obtains an owner’s policy to protect their investment.
In scenarios where a property is purchased with cash, typically only an Owner’s Title Policy is acquired, as there is no mortgage lender to protect. Conversely, during a refinance, a new Lender’s Title Policy is generally required to cover the new loan amount, but the existing Owner’s Policy from the original purchase remains in effect for the homeowner.
The responsibility for paying for these policies can vary. Generally, the borrower pays for the Lender’s Title Policy as part of the closing costs. For the Owner’s Title Policy, payment responsibility can be negotiated between the buyer and seller or dictated by local customs.
In some regions, the seller customarily pays for the Owner’s Policy, while in others, the buyer may be responsible, or costs might be split. The cost of title insurance typically ranges from $500 to $3,500 per policy, depending on the property’s value and location.