Who Buys Title Insurance for a Real Estate Closing?
Navigate title insurance for your real estate closing. Understand who benefits, who requires it, and who covers the costs.
Title insurance serves as a protective measure in real estate transactions, safeguarding property owners and lenders against potential financial losses stemming from defects in a property’s title. These defects can include issues that existed before the current ownership, such as errors in public records, undisclosed liens, or prior claims against the property. This specialized insurance provides a one-time premium payment for coverage that extends for the duration of ownership, offering peace of mind by addressing unforeseen title-related complications.
Homebuyers and Owner’s Policies
Homebuyers are the primary beneficiaries of an owner’s title insurance policy, which protects their equity and investment in the property. This policy provides coverage against a range of issues that could jeopardize ownership, such as forged deeds or other documents, errors in the recording of legal documents, or claims by previously undisclosed heirs. It also covers defects arising from unreleased mortgages or prior judgments against previous owners. An owner’s policy is an often optional purchase that shields the buyer from financial losses and legal expenses.
A standard owner’s policy typically covers defects that are discoverable through a public records search at the time of purchase. These might include outstanding mortgages, unpaid property taxes, or recorded easements. An enhanced owner’s policy offers broader protection, often including coverage for issues that might not be found in public records, such as unrecorded easements, boundary disputes, or forced removal of structures due to zoning violations. The enhanced policy can also provide coverage for certain post-policy events, like mechanics’ liens for work done before closing but filed afterward, or challenges to access rights.
Lenders and Loan Policies
Lenders require a loan title insurance policy, also known as a lender’s policy, when providing a mortgage. This policy protects the lender’s financial interest in the property, ensuring the validity and priority of their lien against the property. It shields the lender from losses if a title defect impairs their ability to enforce their security interest, such as if a prior, unrecorded mortgage surfaces. The coverage amount for a lender’s policy is equal to the loan amount and decreases as the mortgage principal is paid down.
A loan policy ensures that the lender’s investment is protected against various title defects. Without a clear title, the property serving as collateral for the loan could be at risk, potentially leading to significant financial losses for the lending institution. This policy provides assurance that the lender’s mortgage is a valid and enforceable lien against the property. It confirms that the property can be used as collateral and that the lender has the legal right to foreclose if the borrower defaults.
Payment Responsibilities
The responsibility for paying for title insurance can vary depending on local customs and the terms negotiated in the real estate contract. In many regions, the buyer is typically responsible for purchasing the owner’s title insurance policy. However, the seller may agree to pay for the owner’s policy as part of the negotiation. This payment arrangement is a point during the offer and acceptance phase.
The loan title insurance policy is paid for by the borrower. Since the lender’s policy is a requirement for securing the mortgage loan, it is considered a direct cost. Both the owner’s and lender’s title insurance premiums are typically included as part of the overall closing costs. These costs are itemized on the closing disclosure statement provided to both buyer and seller before the closing date.