Why Are There Different Title Insurance Policies For Owners And Lenders

When selling or purchasing a home, you’ll notice two types of title insurance on your closing statement – one for owners and one for lenders. The owner’s title insurance can be known as an owner’s policy, while the one for lenders is also known as a lender’s policy. Why are there different title insurance policies for owners and lenders? It probably comes as no surprise that there are two different policies to protect two different parties.

What is Title Insurance?

Title insurance is a version of indemnity insurance. It works to defend owners and lenders from financial loss if they experience damage from a defect in a property title. It’s a critical form of protection many people benefit from in the home-buying process.

In a real estate transaction, title companies look at titles to find claims or liens against the subject property. They will look through public records to ensure the status of the property. Before any deal happens, a clean title is necessary. Sometimes, certain defects will “cloud” the title, or make it unsuitable for conveyance. As the property’s history is thoroughly reviewed the underwriter examines the title for insurability.

Although title companies are staffed with skilled professionals, it’s still possible that they might miss something crucial., or that an important defect is simply not discoverable. Some risks are impossible to find. Title insurance provides coverage if issues appear later, saving you from financial failure if something gets missed in the examination process.

What is Title Insurance for Owners?

As with any major purchase, risks come with buying a home. Past owners may have made errors in clearing the title when conveying it to a new owner. In some rare cases, fraud may even have occurred. Title insurance for owners protects the buyer against these issues if an error arises.

A few of the troubles that might come up include the following:

  • A defective or unmarketable title 
  • Fraud, including forgery, undue influence, duress, incapacity, or impersonation
  • Clerical errors
  • Undocumented easements
  • Physical encroachments missed in a survey of the property
  • Undisclosed tax liens due and payable at the time of sale
  • Falsified information on the deed

Without an owner’s policy, any of these surprise clouds on title can cause a huge problem for a homeowner. Owners who encounter these troubles may have issues with a third-party who could claim rightful ownership of the property. If you obtain title insurance as an owner, you lower the risk if the inspection passes over something critical. They might not appear until far later.

In Illinois and Wisconsin, it is common for the seller to purchase the owner’s policy for the buyer. 

What is Title Insurance for Lenders?

Title insurance for lenders is a little different. This coverage protects only the lender, who typically takes on a greater share of the risk (80%, for example, if a buyer has put down 20% in their purchase), and not the home buyer, from legal claims on the property. In Illinois and Wisconsin, it is typical for the buyer to pay for the lender’s title policy.

Is Title Insurance Required?

When you purchase a home, title insurance is essential. That said, an owner’s policy is not always legally required.

For financed properties, any major lending institution will require a buyer to purchase a lender’s policy. There are large sums of money at stake, and a lender will certainly ensure that their interests are protected should the unexpected happen.

As we’ve discussed, a lender’s policy only covers the lender’s interests should a claim arise. Because the average home price is approaching $400,000 in the U.S., and the typical owner’s policy costs a mere fraction of that (in most cases, less than 1% of the purchase price), forgoing a policy to cover your most precious investment, not to mention your physical shelter, is not recommended.

Who Pays for Title Insurance?

In Illinois and Wisconsin, the seller usually purchases the owner’s policy as part of their closing costs and the buyer covers the lender’s title insurance policy. However, the buyer and seller can negotiate to split the premium for the owner’s title insurance or have the buyer purchase the policy. When negotiating the finer points of a purchase contract, it’s not uncommon for a buyer and seller to negotiate credits, prepaid items, and closing costs. It’s at this point in the home buying process that any changes to customary closing arrangements should be considered. In order to decide what arrangement is the best choice for you, it’s critical to understand how much title insurance costs.

How Much Does Title Insurance Cost?

The most significant variables impacting title insurance rates is the cost of the home or the size of the loan being insured. Most title insurance companies use either a “rate per thousand” system or a tiered system in which a fixed rate is charged, based on which tier the sale price of the home falls into based on price point.

The lender’s title insurance rate is often about half the rate of the owner’s title insurance, but not always. Insurance rates can be adjusted in either direction due to a number of variables. A policy might cost more for a policy that poses extra risk, for additional endorsements, or for an unusually complex title transaction. 

What Does Owner’s Title Insurance Cover?

Here are a few of the things that the owner’s title insurance covers:

  • Legal fees: The insurance will cover any legal fees that arise from a third party.
  • Court costs: The insurance will cover any costs that will come with court hearings associated with the title.
  • Unknown issues: The policy will cover any troubles, like unpaid property taxes, that you didn’t know about before signing the title.

These will serve you well if any troubles arise with the investment process.

Those without coverage will find themselves dealing with high costs to fix errors they didn’t know about before or didn’t anticipate.

Risks of No Title Insurance

Some individuals might think that they can handle the purchase of a home without a title insurance policy for owners. If this statement applies to you, it’s critical to think about the risks that come with purchasing without title insurance. These can be detrimental to homeowners who don’t have many finances to work with in the purchasing process.

Some of the biggest risks that come with avoiding title insurance include:

  • Paying debt: You might end up paying for a debt that doesn’t belong to you but comes with the home.
  • Losing a home: You might lose the home to a suing third party based on error.
  • Losing a portion of property: You might lose a portion of the property due to encroachment troubles.

Nobody wants to lose possession of a home they’ve worked so hard to get. If you don’t get title insurance, you risk handing over your property to a third party if an issue goes unchecked in the initial title inspection. It’s worth the cost.

Protect Your New Life

Protection comes in handy in all aspects of life. When purchasing a home, there are two policies – insurance policies for owners and insurance policies for lenders. When financing the purchase, the lender’s policy is required. The owner’s policy is optional. Both work to protect their respective policyholders.

Landtrust Title: Your Partner for Results

When your real estate agent works with Landtrust Title, you get a partner for results. We do things differently than other title companies — whether it’s personalized support, convenient closing times that meet your schedule, or quick and easy payment methods ensuring everyone gets paid right away, our attention to detail will help ensure a smooth transaction. We are happy to answer any and all questions you may have, and we’re obsessed with making your experience so seamless, you don’t even have to think about it. If you have questions about what to expect when your real estate deal closes, Landtrust Title Services can help. Please contact us today at [email protected] or by phone at 312.528.9210.

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