A title insurance policy ensures a party who sells real property is its true title holder and can legally transfer ownership. A title policy also verifies the property is free of liens and outside interests. Title insurance policies come in two forms. An owner's policy protects a property purchaser from title disputes after closing. A mortgage or lender's policy protects a lender's investment from title claims.
Typically, real estate lenders require title insurance to protect their mortgage interests. Title policies cover legal defense costs and actual damages resulting from title claims. Also, many lenders sell their mortgages after closing and many secondary loan buyers, such as Fannie Mae, require title insurance before they purchase mortgages. Title policy coverage amounts decrease as loans are paid down and policies are no longer in effect when loans are paid in full.
Title insurance companies research the public land records before they issue title policies. Title searches can reveal third party property interests such as delinquent taxes, judgments and mortgages. Generally, lenders require such interests be removed from public land records at closing. However, they can also agree to lend subject to existing title interests. Easements are a common example. Utility companies frequently record easements for ingress and egress to repair service lines. This is an example of a third party interest a lender typically accepts.
Some third party interests may not show up in public land records. For example, an ongoing boundary dispute between neighbors may be unrecorded. When the seller transfers land to a new buyer, the dispute may continue with the new owner. If the neighbor decides to file a lawsuit over the boundary dispute, the lender's mortgage may be at risk. Therefore, lenders usually require title policies without standard exceptions, which generally cover potential claims that are not identifiable in public land records.
Borrowers are generally responsible for purchasing their lenders title insurance. A premium for it is typically included in a borrower's closing costs. The policy does not require renewals or further payments to remain in effect. Premiums vary for individual title insurance companies. As of 2013, the average lender's policy cost approximately $2.50 per $1,000. For example, a policy covering a $100,000 mortgage costs roughly $250.
- Better Business Bureau: Title Insurance
- California Land Title Association: Title Consumer Series: Why Lenders Require Title Insurance When Refinancing Your Home
- Federal Title & Escrow Company: Lender's Title Insurance Policy
- Stewart Title Guaranty Company: Title Insurance
- California Title Company: The Basics
- Reputation First Title Company: Owner's Policy Standard Exceptions and Their Removal
- Brad Evans Real Estate Loans: "What The Heck is an ALTA Lenders Policy of Title Insurance"
Maggie Lourdes is a full-time attorney in southeast Michigan. She teaches law at Cleary University in Ann Arbor and online for National University in San Diego. Her writing has been featured in "Realtor Magazine," the N.Y. State Bar's "Health Law Journal," "Oakland County Legal News," "Michigan Probate & Estate Planning Journal," "Eye Spy Magazine" and "Surplus Today" magazine.