What Does Lender’s Title Insurance Do and Why Is It Important?
As the value of homes and commercial real estate properties continues to increase at a steady rate, the importance of title insurance is also growing. Most real estate professionals and investors will quickly say that title insurance is one of the most delicate and vital aspect of selling or buying a home, and lenders, buyers and sellers know that full well. From a lender’s perspective, title insurance is just as important as it is for the buyer, since the lender is the one who invests most of the money. While you might provide a 10-20% down payment when you buy a new house, the rest of the mortgage is supplied by your lender, who will always want additional security to ensure that their money won’t be lost.
This is where lender’s title insurance comes in. Required alongside your owner’s title insurance policy, lender’s title insurance is responsible for protecting the investment of the lender in a real estate transaction. Although it’s typically paid by the homeowner, the lender’s policy is entirely designed to protect the lender, and offers little or no benefit to the seller or buyer of the property. The main concern in this regard is making sure that the current mortgage is the only lien that exists associated to the real estate property in question. For that purpose, the insurance company will be responsible for performing a detailed search and looking through old records and documents to see if there any outstanding liens still exist. This is done prior to the lender agreeing to providing the mortgage amount, and lenders know the importance of the search well enough to insist on title insurance each time, before they agree to invest any amount into that property. So, the bottom line is, if your lender speaks to you about title insurance, there are essentially two points to remember: the lender’s title policy will only protect the lender’s investment, and the buyer and seller will have to agree to pay for that policy with their own money.
Another important case when title insurance comes into play is whenever someone issues a claim for the property or a portion of it. Let’s say you just bought a real estate property, and a few months later someone brings forward a document that legitimately provides them with a claim for the title. While your owner’s title insurance can provide you with protection in this case, the lender will also require their title insurance to protect their investment for as long as the mortgage is still valid. If that is the case, then even if the buyer loses the title, the lender’s investment will still be protected, so that the institution will not have to worry that their money would be lost once the former title owner is forced to move out.
While owner’s title insurance policies last for as long as the new buyer remains the titleholder of the home or commercial property in question – such as, until they sell the property or leave it as an inheritance to their heirs – a lender’s title policy actually expires once the mortgage loan is paid off. If the loan is refinanced, the policy is also voided, since the refinanced mortgage will basically pay off the old one. As a result, a new policy will be required, which will repeat the title search just like when the buyer first made their purchase. Whether you are a lender or a property owner, lender’s title insurance is extremely important to know about, as acquiring it is an essential part of the process, before lenders can even agree to the terms of the real estate deal.