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Why Do Lenders and Homeowners Need Separate Insurance Policies?

When you take out a loan to buy a house, there are two different types of title insurance you’ll likely come across: an owner’s policy (or homeowner’s title insurance) and a loan policy (or lender’s title insurance).

These insurance policies protect against defects or other title issues that may arise when property ownership is being transferred. But what’s the point of having two different insurance policies for one title? Read on to find out the importance of these separate types of title insurance for lenders and homeowners.

Lender’s Title Insurance

Lenders often require a loan policy on the issuing of a loan. This policy is based on the amount you are borrowing, and it is there to protect the lender should a title issue arise. A loan policy will not protect you as a buyer, and it doesn’t cover the full value of the property—only the amount of your loan that has not yet been paid off. 

As you pay off your loan, the policy amount will decrease, and protection ceases when the loan is fully paid off.

Owner’s Title Insurance

While a loan policy is based on the amount you borrow, an owner’s policy covers the entire purchase price of a home, including things like a down payment that wouldn’t be included in a loan.

Homeowner’s title insurance is paid as a one-time fee at the close of the sale, and there’s no expiration date to its coverage; it remains valid as long as you have an interest in the property.

This is the insurance that will protect you as a buyer if there is a title problem. Some of the issues that you may deal with when it comes to a covered title include:

  • Errors in a deed
  • Forgery 
  • Mistakes that occur during record examination
  • Undisclosed heirs

An owner’s policy will also insure your property in the case of a foreclosure. If a foreclosure was mismanaged, a loan policy would not protect the lender.

Why You Need Both Title Policies

Although both a lender’s and a homeowner’s policy will apply to the same title, they protect different parties. Lender’s insurance protects the lender, while a homeowner’s title policy covers only the buyer.

A lender’s policy will almost always be required in order to receive a loan, but a homeowner’s policy may not be. However, it is a wise investment that will protect your ownership of the home should any claims come forward contesting your legal right to the property.

Such a claim could come in the form of back taxes or conflicting wills. A dispute with your title could also stem from incorrect signatures, forged documents, or fraud; outstanding lawsuits or liens; and contested ownership by another property, to name a few potential causes.

If you were to buy a home from a fraudulent seller who didn’t actually have ownership of the property, from someone who may not have realized a co-owner’s signature was required, or that had a previous lien related to unpaid debts or taxes, you could lose the money you had already paid or be held accountable for the outstanding lien.

But title insurance can cover both the legal fees to resolve the issue and financial losses you suffer due to title defects. Using a homeowner’s and a lender’s insurance policy will provide the most comprehensive protection for both parties involved.

Complete Protection for Your Property

Costing an average of $1,000 to $1,500, title insurance that includes both a lender’s and an owner’s policy isn’t nearly as expensive as the costs of dealing with title defects.

Although you may think title fraud is unlikely to happen to you, the benefits of having an owner’s policy when you need it greatly outweigh the risks of not having one.

If you are unsure which types of insurance you need, Bethany Insurance has expert agents who can help you determine the policies that will best protect your home and interests at an affordable price.