Why You Need an Owner's Policy, Not Just Title Insurance
July 2, 2018
With so many mandatory fees and surcharges required to close on a home, you may be tempted to pass on other "optional" closing costs, like a title insurance owner's policy. After all, you probably noticed one title insurance fee was already a portion of your home's required closing costs. Now, you're not alone if you're confused by the need to purchase what seems to be two overlapping insurance policies for your home. But it's important to know that the title insurance lender's policy your bank requires you to buy before funding the mortgage isn't the same thing as the optional title insurance owner's policy your real estate agent is recommending you buy to protect your investment. The lender's policy only protects the lender. That means that without an owner's policy, your financial investment in your home is at risk.
The Risk of Skipping an Owner's Policy
Title problems are a rare but serious problem that can arise during homeownership. It may seem like overkill to purchase a separate owner's policy at closing at an average cost of several hundred dollars to more than $1,000, but the cost of not doing so could be much more significant, even resulting in the loss of your home. That's because when title problems do come up, they tend to be pretty complicated. Imagine you bought your home nearly a decade ago, only to receive an official letter telling you your house was built on the wrong lot. Or if you learned your real lot was the vacant lot next door! Or picture being a first-time homebuyer. You purchase a home with a spacious fenced-in backyard, and a back deck patio and garage shed. Two years later a man shows up on your doorstep claiming to be the owner of your backyard. This happened to a Nova Scotia man who didn't purchase title insurance. Luckily, the man was able to keep his home and resolve the issue after two years of legal proceedings. Or imagine you've finally purchased your dream home, and you even paid cash. However, eight years later, half of the yard under your house falls into foreclosure. There's been a mistake, and half of your yard isn't included in the sale, and so has eventually fallen into foreclosure. This is the tricky situation that befell one Texas homeowner. She didn't have title insurance and thus may have some difficulty resolving the situation. Other problems can surface, as well. A distant relative or ex-spouse of the original seller could claim ownership. Sometimes a hidden mortgage that was missed in the title search could resurface. It's also possible to get hit with a bill from an old contractor, referred to as a mechanic's lien, or to find out a past owner accrued delinquent back taxes. Without a title insurance owner's policy, all these problems fall to the current homeowner to solve themselves.
The Two Types of Title Insurance in More Detail
Complex title issues can emerge for the buyer of any property, whether it's brand new construction or a historic home. This is why most lenders won't finance a mortgage until a buyer purchases a new title insurance lender's policy. This is the type of title insurance required almost across the board for home purchases large and small. It's called a lender's policy because it protects the lender from financial losses due to title claim issues, like those mentioned above. However, a lender's policy only protects the lender's interest in the property, that is, the remainder of the mortgage loan still outstanding should a title claim be successful in court. This leaves the buyer at risk when it comes to the investment of their down payment, as well as equity, appreciated value, and any improvements to the property. This is why many real estate professionals recommend buyers also purchase a title insurance owner's policy. If a challenge is made against the title, the insurance will fund your defense in court, often successfully resolving the title claim in your favor. Should the homeowner be unsuccessful in their case, the title insurer will reimburse the homeowner, not only for the value of the mortgage but the homeowner's total investment.
The Insurance You Need to Protect Your Home
As record-keeping practices improve and more homes change hands through the title search and closing process, more and more title defects are cleared, and serious title issues are less common. However, when they do come up, title claim issues remain a serious risk to home buyers. That's why it's highly recommended you protect your home and your investment with an owner's policy. No one wants to pay for an optional expense they don't need, but when it comes to protecting your investment in your home, it's best to avoid the unnecessary risk of not buying title insurance. Best of all, an owner's policy stays with you for the entire time you own your home. No matter how many times you refinance, where a lender will ask you to purchase a new lender's policy, your owner's policy will remain in effect, protecting you from old claims decades after you settle into your new home.