Why Does Your Lender Care About Title Insurance
When you have a home, it is to be considered one of the main assets that you ever owned. At least, this is the case for almost every homeowner. When you go to buy a home, you have to consider getting title insurance among other types of insurance policies before you move into the home.
In this article, we will focus mainly on title insurance for those who intend to purchase a home. In the grand scheme of things, there are certain situations that could be a threat to someone owning a property and for their mortgage position. This is the reason you need title insurance, which simplifies the title search process.
The Responsibilities
When you buy a home through a lender and assume a mortgage, the lender will usually make it mandatory to acquire title insurance for your home. With title insurance, you will be protected and the lender will also be protected against financial losses that could result from issues with the title of the home.
There are fees associated with these issues, which the lender would have to take responsibility for. Some of the issues that would arise include forged documents related to the title, unpaid debt in the form of liens on the property, improper documents, or conflicting wills associated with the property. All of these could possibly blemish or obscure the title of the property.
Lender’s and Owner’s Insurance
What is title insurance? The two kinds of insurance that exist include lender’s title insurance and owner’s title insurance. The lender’s title policy is the one that offers protection to the lender. The owner’s title policy is the opposite. It offers protection to the homeowner or homebuyer.
Even though, the owner’s title insurance is not mandatory, it is best to get both. The lender does require that you purchase a lender’s title insurance on their behalf. Getting both of them keeps your investment safe against any unforeseen circumstances as it relates to the title.
The Scenarios
For instance, let us say that you are buying a home and the previous owners suddenly passed away. You then find out that they left a bunch of liens on the property due to unpaid taxes, HOA fees, or water bills owed to the city. Sadly and by law, creditors are not interested that you were not responsible for those lines or unpaid bills, which are associated with the property.
One more example could be soon after purchasing and moving into your new home, you discover that the seller made a will and gave the property to a child or grandchild. Now, you have to face a legal battle.
If you purchased title insurance for the property, you would not have to go through all of that because title insurance takes care of legal expenses due to property disagreements and unresolved debt.
The lenders know that these two scenarios or examples can potentially happen and that is why they make title insurance so mandatory for the home buyer. The title insurance professional knows how to resolve and remove liens or anything that clouds the title of the property. Once a search is done and there are issues or errors, the title insurance company will do what it takes to eliminate them.
What Is Title Insurance?
To acquire insurance, a title search has to be done. The search allows the lender and owner to know if the title is clear or clouded.
You can use a title company or real estate lawyer to perform these searches prior to closing the home buying transaction. A complete title search means that the search has to go as far back as forty years, if possible. The situation dictates the kind of search to be done. It depends on what the lawyer or title company deems necessary.
Some areas of search include:
Mortgages
Judgments
Liens
Ownership history
Foreclosure or bankruptcies
Easement or property access
Fraud
Overdue property taxes
Undisclosed inheritance and conflicting wills
Forgery
Missing details
Illegal deed transfer
Flawed documents such as inappropriate recordings from closing and escrow
The title company will cover all of these things on behalf of the lender and the buyer.
The Coverage
As is the same thing with other kinds of insurance, you should expect the title insurance company to allow expansion of coverage via endorsements of the policy.
These are known as riders, which can be added at a small cost. These endorsements might include:
Violations of building ordinance
Easements of others on the property such as the right of access by pedestrians and vehicles
Restrictions to subdivision
Disputes
Violations of private restrictions
Violations of specific zoning
Before you purchase title insurance, you will receive a detailed commitment in advance. The title commitment will have everything that is covered and what is not covered.
The title insurance is usually issued to the buyer prior to closing. Bear in mind that the lender must have access to all of this documentation to make sure that their interest is represented.
The Lender
Most lenders want to make sure that their best financial interest is served when someone purchases a new home. The title insurance gives the lender some type of relief to know that the property is free of all the things that could make the transaction not move forward.
Therefore, the lender’s financial interest would be threatened from not being able to complete the deal and being entangled in a messy situation, if there were any issues related to the property.
No lender wants to wrestle with all the issues discussed above and so a title insurance policy will provide the solution. In the title search, other issues could be discovered such as:
Unrealized liens
Overlooked heirs
Outstanding mortgage
The lender would have to stall the transaction to work on the issues. If they are complicated, it is possible that the transaction will not move forward. In that case, the buyer has relinquish the pursuit of the loan and move on to something else. That also creates a loss for the lender.
Chain of Title
A lender orders a chain of title to see who has owned the property over the past two years or 24 months. The lender could be looking for anything that looks fraudulent or fishy. In addition to mortgage fraud, the lender is also interested in whether a property flip was done.
These flips come about when a real estate investor purchases a home, renovates it, and attempts to sell it at a higher price. If it is an FHA loan, the real estate investor has to follow the flipping rule by waiting for at least ninety days after ownership to be able to sell a property.
To prevent this, lenders will have a title search requested. If anything is missed or overlooked during the search, title insurance is significant in helping to provide coverage.
Now, you see why lenders make title insurance mandatory.
Most lenders process loans for homeownership in billions of dollars. This means, the lender has a lot at stake, and to cover the loan collateral or asset, the title insurance policy is a must. For this reason, the potential property owner should follow the experience and knowledge that lenders bring to the table to have a smooth transaction; in addition to protecting this major asset.
Lender’s Title Insurance
If you are refinancing or purchasing a home or land, the lender requires that you get title insurance to insure their lien position. What does this mean? If your lender is approving a loan for a first mortgage, the lender will have the first position on the lien. So, if another mortgage exists on the property, this has to be satisfied prior to closing or during the closing process. If this is not done, then the lender will not settle for the loan to be in second or third position.
When a lender is providing you with a first mortgage, the intention is for them to be in the first lien position at all times. One of the most important and significant reasons for this is to be the first to be compensated in lieu of foreclosure.
Whichever lender is in the first position during a foreclosure is the one that gets first preference as it relates to being compensated.
The title insurance for the lender provides iron-clad insurance and protection for the lender against any missed items found in a title search or any legal claims submitted against the property. In that case, the lender would require that the amount of the insurance be equal to the size of the loan to provide full coverage. For example, if the loan amount is $250,000, then the title insurance policy has to be $250,000 as well.
The home buyer or borrower is the one who pays for the lender’s title insurance. The only way that the borrower will receive the loan is to pay for the lender’s title insurance policy.
Owner’s Title Insurance Policy
When you are buying a home, and it requires that you seek a mortgage loan to complete the transaction, it means that the lender will require certain things including title insurance coverage and homeowner’s insurance coverage; among other things.
In addition to the lender’s insurance, the borrower has the option to purchase coverage as added protection. This is not mandatory, but it is a smart way to do it, and it is also safe.
Added coverage for the potential homeowner carries the same weight, as a lender’s insurance in that it protects against someone who may file a lawsuit or claim against the new owner and if there are any mistakes in the title search. In the case where a loan is a part of the scenario, the cost of the insurance is usually calculated to show an amount over and above the amount of the loan.
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The Examples
Here is an example of the owner’s title insurance so that you can understand it clearly:
Say that you were buying a home for $450,000 and the first loan amount on the mortgage is $300,000. Coverage for the lender’s title policy would be the same as the loan amount, which is $300,000. The owner’s title policy would be the difference of $150,000. Of course, the owner’s policy could offer coverage for the full amount of the purchase price, which is $450,000. However, the cost would be based on $150,000 (the difference between the full purchase amount and the loan amount).
Don't forget: the owner is the one that pays for both coverage; the lender’s and the owner’s policy.
If you were going to buy the home for cash, you would save money on the cost of coverage for the lender’s policy. Let us use the same example of $450,000 as the purchase price. You would have to use $450,000 for owner policy coverage. Therefore, it would be calculated based on the purchase price and that means you would not have to split it with the lender’s policy.
Finally, let’s cover a few more topics related to title insurance that may interest you:
The cost of title insurance depends on the state in which you are going to purchase the property. Each state has its own laws as it relates to title insurance coverage. It also depends on the title company and the type of coverage. The premium might be quite different in the state of Maryland as it would be in the state of Georgia; one lower than the other. North Carolina tends to be the cheapest. Most title companies have online calculators to help you to figure out the cost. You would enter the loan amount, purchase price, and the state for an estimated cost.
When the purchase agreement has been initiated and signed, a closing agent, title company or escrow agent starts the process of acquiring title insurance. A few major companies throughout the United States provide this service, but there are also regional companies that you can choose from. You would likely pay between $500 to $3,500 for title insurance as an owner, but again, it depends on the purchase price and the state where you live as well as the insurance company you have chosen. Most times, the owner’s and lender’s policy have to be purchased together for all parties to be fully protected. Title insurance is a one-time fee. You do not have to pay a monthly or annual premium. The lender’s policy is effective for as long as you have the loan. The owner’s policy also has to be current for as long as the person owns the property.
You might want to know how title insurance policies work when you are refinancing a loan. Due to the fact that the property is still owned by the same person, the owner’s title is not switching hands and a refinance is another mortgage loan. For this reason, new title insurance is necessary to secure and protect the lender, but in second position this time since a refinanced loan is actually a second mortgage. If you are using a different lender for the refinancing, the same thing is true as it was for the first lender. Each lender always wants to be protected with a title insurance policy. Moreover, the lender is not immediately privy to any changes that may have occurred in your life such as a divorce, line of credit, marriage, and another mortgage. Therefore, unless a title search is done, this information won’t be known or proven. Before you can obtain a new loan, this is one of the reasons why a title search has to be done – to determine what, if anything has changed since the first loan was approved. The lender wants to be fully protected against the property’s deed, holding a prominent position at all times.
Conclusion
The bottom line is that a clear title is a necessity in any real estate transaction. A search must be done to check for liens, outstanding property taxes, proof of property ownership, encumbrances, and legal judgments, inaccurate signatures on real estate documents, unsettled building code violations, title defects, erroneous property surveys, lawsuits, or claims.
There are too many risks associated with not having a title insurance policy; risks to the lender and to the homeowner. No lender wants to approve a loan and then learn afterward of unrecorded liens and lawsuits associated with the deed. Every lender wants to be covered.
If you want to learn more about this topic, and anything related to real estate, check out the Goalry Platform where you can visit the Insurry and Accury stores, packed with information including what is title insurance.
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