Anytime you finance a home purchase — whether through a VA loan or a conventional mortgage lender — you’re required to buy lender’s title insurance as part of your closing costs. If you refinance, you’ll need to buy lender’s title insurance but not an owner’s policy since the property isn’t changing hands.
Lender’s title insurance protects the lender for the duration of the loan in case there’s a titling issue such as a lien on the property or a boundary dispute with a neighbor. But what does that mean for you?
Buyers are not required to purchase owner’s title insurance but many do so to provide themselves with the same peace of mind, since a home purchase often represents a significant portion of their net worth.
“People generally obtain them because they don’t want the expense or uncertainty of having to litigate any adverse claims to the title, liens, and so forth,” says John R. O’Brien, a Chicago attorney who’s been handling real estate transactions for more than three decades. In some states, such as Illinois, the seller typically pays the one-time premium for owner’s title insurance, so there’s no expense to the buyer.
Title insurance offers protections before you actually close on a property and afterwards if issues later arise.
“We do a very detailed search to understand whether, for instance, there’s a lien on the property or a dispute over ownership,” says Daniel Price, President and CEO of OneTitle National Guaranty Company, a direct title insurer. “If we discover any of those issues, we let you know and you or your attorney have a chance to work with the seller and resolve these issues.”
If a dispute surfaces later on, the title insurance company might pay to settle or litigate the dispute on your behalf. Without owner’s title insurance, you’d need to hire an attorney on your own dime. “If it turns out that someone actually has a legitimate claim against the house—including either ownership or liens—the homeowner would have to pay those damages or could lose their house,” Price says. “There may be opportunities for the homeowner to sue someone else, for example the person who sold her the house, for damages, but again, they will be on their own in terms of hiring attorneys and going to court.”
Your mortgage company or real estate agent may present with you a lender’s title policy, but you have the option to shop around rather than simply accepting the policy. Since title insurance coverage is highly standardized, Price recommends considering the quality of the company rather than trying to compare the specifics of what’s covered.
Costs Will Vary
Cost is also a consideration, but if you’re purchasing a lender’s and owner’s policies through the same company, the extra cost for an owner’s policy may be incremental.
“The premium is a sliding scale, so it’s not a straight percentage based on the value of the mortgage depending on whether we’re talking about an owner’s policy or a lender’s policy,” Price says. “Fees will vary wildly depending on whether you’re working with an agent or working directly with an underwriter.”