Upon the closing of a home purchase, the seller transfers title, or the right to legal ownership of the property, to the buyer. Before that sale can be finalized, the parties commission a title search, or a review of the public records to ensure that the seller actually has the right to transfer title to the property, free and clear of any clouds or encumbrances. During the title search process, your title company will identify and clear any known encumbrances and work with the seller and the seller’s representatives to resolve them.
If the title search process were perfect, the resolution of known defects could serve as the conclusion of the home sale. Once all defects had been identified and either resolved or agreed to by the parties, the sale could close without further delay. Of course, this is not always the case. The title search process is far from perfect, and even the most diligent search can fail to turn up issues that may not be reflected in the relevant public records, including unrecorded liens, unidentified heirs, bankruptcy, or other valid but unknown claims against the property’s title. To protect the interests of purchasers and lenders, and to make it possible for individuals to transfer a property’s title in light of this room for uncertainty, title insurance was developed.
The Two Types of Title Insurance Policies
There are two types of title insurance policies typically issued at the closing of a real estate transaction. Owner’s title insurance, or an owner’s policy, protects the purchaser’s title rights against an unknown claim. The lender’s title insurance policy, also called a lender’s policy or loan policy, protects the mortgage lender’s priority as a creditor in the event of a forced sale of the property.
The policies are issued and paid for separately, and they protect different interests – the owner’s policy protects the owner’s equity and ownership interest, while the lender’s policy protects the creditor’s interests in the event of a default or other claim to ownership.
It is important to remember that all title insurance is backward-looking. Unlike other types of insurance such as homeowner’s insurance, health insurance, or auto insurance, which protect against claims that arise after the policy is issued, title insurance only protects against claims that exist but are unknown as of the date of closing. For this reason, title insurance is purchased with a one-time premium as of the closing date, and the policyholder is not required to make ongoing payments.
Owner’s Title Insurance
Owner’s title insurance helps protect the buyer’s title interest in the event someone sues, even years after a sale, to enforce their rights to or against the property in question. Claims for mechanic’s liens by contractors, disputes regarding property boundaries, or liens for unpaid taxes or utilities are uncommon but do arise, and can create complicated questions of ownership and title. In these cases, the purchaser’s rights are likely to be found to be subordinate to those of a prior creditor or owner. Without title insurance, an owner could face the prospect of not only financial devastation, but the uncompensated loss of their home.
Owner’s title insurance is a critical protection for all home purchasers. Even if you are purchasing a newly constructed home that has not been owned before, disputes about the ownership of the underlying land, mechanics liens from construction contractors, or boundary line disputes can cloud title and create thorny and expensive disputes.
An owner’s policy is generally issued for the full purchase price of the property, and obligates the insurer to protect the owner’s title interest, including attorney’s fees and costs associated with any dispute. The terms of the policy, including what kinds of claims are included and which are excluded, are explicitly laid out in the policy itself. Even in the deluge of paperwork that accompanies a home sale closing, it is vital that purchasers read and understand their title insurance policy.
Who Pays For The Owner’s Title Insurance Policy?
In Illinois and Wisconsin, the seller typically purchases the owner’s title insurance policy as part of the seller’s closing costs. However, this convention is largely a matter of tradition, not law; the parties to the deal can choose to negotiate an arrangement in which the buyer buys the policy or the parties split the cost of the owner’s title insurance policy.
Lender’s Title Insurance
A home mortgage lender is a secured creditor, meaning that this loan is backed by collateral, or an asset that serves as protection in the event the borrower defaults. In the event of a default on the debt obligation, a secured creditor has the right to seize and sell the collateral asset to recoup its investment. In the event of a mortgage, the home itself acts as the collateral for the loan. In the event of a default by the borrower, the lender maintains the right to foreclose on the home, sell it, and recover the due and unpaid balance of the loan.
The value of the collateral, and the right to foreclose and sell the property to recoup the lender’s investment is central to the mortgage lending process. Without the intrinsic value of the property itself, the lender would be forced to rely exclusively on the buyer’s ability to repay the loan, making most mortgage loans too risky to be issued. The right to seize and sell the collateral, however, makes the lender’s investment safer and ensures that even a default does not mean financial ruin for the lender. For this reason, secured loans usually carry a lower interest rate than unsecured loans.
Title insurance is a key component of the mortgage lending process. If a lender were to provide a substantial mortgage loan, only to have its priority usurped by an older pre-existing claim against the property, its investment could be rendered worthless overnight. In order to recover after a forced sale, the lender would have to wait until the earlier creditor’s claim had been satisfied, which could result in settling for only a small fraction of its initial investment.
Lender’s title insurance protects the lender’s priority interest in the event that a prior claim against title is discovered after the transfer of title but before the loan is paid off. In the event a claim is discovered or a sale is forced, the title insurance company will pay the lender any remaining amount of the loan, as well as any fees and costs incurred. All mortgage lenders require a lender’s title insurance policy to be issued at closing.
Who Pays For The Lender’s Title Insurance Policy?
In Illinois and Wisconsin, the buyer typically pays the lender’s title insurance premium as part of the buyer’s closing costs. The premium is a one-time cost, and the policy protects against claims that existed but were not known to the parties at the time of the sale. The policy is issued for the amount of the loan, with protection remaining valid until the homebuyer either pays off their mortgage or refinances their loan.
Learn More From Your Trusted Title Insurance Company
Protecting your interests and assets during a home purchase with title insurance may be the most important thing you’ll ever do — and you don’t have to navigate the ins and outs of owner’s and lender’s title insurance policies alone.
If you have questions about what title insurance can do to protect you, what it involves, or how to get it, Landtrust Title Services can help. Please contact us today at [email protected] or by phone at 312.528.9210 to get answers to all of your questions.