Sep 8, 2018

The 2 Types of Title Insurance

When it comes to Texas title insurance, there are two kinds of title policies. Most folks don’t realize it because there are so many figures and fees on their closing documents. It’s easier just to lump the title premiums together and ignore the details.

Loan Policy

This is also called a lender’s policy. It protects the lender’s interest in the property until the mortgage is paid off. Lending institutions require this title insurance when issuing a mortgage or refinancing a property.

A Loan Policy covers unrecorded liens, title defects, fraud, encumbrances, access rights, and more. It gives the lender protection to ensure that their mortgage has priority over other liens, and that their lien is valid and enforceable.

A loan policy covers up to the amount of the loan and decreases as the mortgage debt is reduced. The loan policy doesn’t protect the owner’s equity in the property. So, if you purchased a home for $500,000 and financed $300,000 of the price, then the lender’s policy would be for $300,000. If a valid ownership claim was made, the title insurance could cover the lender losses up to $300,000.

In most residential real estate transactions, the homebuyer has additional interest in the property. The second type of title insurance helps protect that buyer’s investment.

Owner’s Title Policy

A separate owner’s policy safeguards the rights and interests of the homebuyer. It covers the buyer’s equity in the property up to the face amount of the policy – which is typically the purchase price. This title policy stays in effect for as long as the buyer or their heirs own the property.

The owner’s policy protects the owner from the covered risks listed in the policy and will pay valid claims and legal defense costs to defend a claim against title to the property. Examples of policy coverage include errors, previous judgments against the property, forgery, defective records, incorrect signatures, and more.

An owner’s policy doesn’t include an increase in your property’s value. It only covers the owner up to the value of the property at the time they bought the title policy. If a homebuyer wants an endorsement to add an increase in value to their policy, that can be discussed with the title company prior to closing.

Who pays the title insurance premium is negotiable. In Texas, the buyer typically pays the smaller Loan Policy premium and the seller pays the higher Owner’s Policy premium. Like the loan policy, the owner’s policy is issued at the time of purchase for a one-time fee. The cost of the policy is usually included in the closing costs.

Prior to issuing any title policy, the title company will conduct a thorough search of the property’s title history. Obtaining title insurance doesn’t guarantee that the homebuyer will never have a title problem. But it does ensure that the homeowner and their lender will have coverage if problems do arise.

The opinions expressed are of the individual author for informational purposes only and not for the purpose of providing legal advice. Contact an attorney to obtain advice for any particular issue or problem.
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