What’s The Difference Between A Lender’s Policy and An Owner’s Policy

To shop for a home in the US means learning about the legalities involved in property transactions, which are designed to help protect buyers and sellers. This includes investigations into title searches, appraisals, and other steps that lets everyone know of potential complications with the sale. Homeowners need to understand their obligations and mechanisms built to protect them when it comes time to navigate these requirements. For example, owner’s title insurance is one way we’re protected during this process.

The Basics Of Title Insurance

To understand the difference between owner’s and lender’s title insurance, it is helpful to first know how this type of insurance works and what it protects against. Title Insurance has been around for a long time and while it is simple in concept,  it exists in many countries under different forms. In some cases, like the United States, Lender’s Insurance is required by law as part of a sale but Owner’s insurance is not mandatory.

The reason other countries use title insurance less commonly than the U.S. is due to a variance in how deeds are registered. In the U.S., most states’ registrar of deeds does not affirm an undeniable title. However, in other countries, title insurance normally appears when an American financial institution is sponsoring the project or when it’s an American company purchasing property overseas.

Title Insurance Requirements

The requirements of coverage protections for title insurance are mostly similar from state to state, with small variances. There are a variety of ways to check on the requirements for coverage in a given state, but the simplest usually involves consulting the state government’s page for the topic. There, the required coverage is spelled out, and one can confirm that the coverage conforms with the law. In every state, parties to the transaction will be required to purchase a lender’s policy when receiving financing for the purchase of the property.

Owner’s Title Insurance vs. Lender’s Title Insurance

Owner’s title insurance protects the owner from claims against the title that predate the purchase of the property, and lender’s title insurance protects the lender. That is the primary difference between the two. In many cases, the coverage provided will be identical, and that is due mostly to the basic kinds of issues this insurance covers being standard, and including the following:

  • Debt claims against the property
  • Contractors’ claims for the cost of work to improve the property
  • Unknown co-owners or heirs
  • Tax liens

Some owner’s policies include options for additional coverage for a variety of circumstances. This additional coverage comes at a cost, but if there is a significant risk involved in purchasing the property for whatever reason, it might be worthwhile to upgrade the coverage. The cost of the lender’s insurance will be listed in the transaction paperwork.

What Are the Consequences of Not Using Title Insurance?

Real estate transactions are complex. Things can go wrong if the previous owner still has claims on the property. For example, they might have used it as collateral for a loan, made improvements or repairs to it that need to be paid for, or there could be co-owners or others with a legal claim to the property. Without insurance coverage for buyers, they would not only lose any money they’ve put into improving or repairing the house, but also their investment in purchasing it outright. This means that lender’s debt would be insured, but not buyer’s out-of-pocket costs.

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