Lenders vs. Owner’s Policy – March 2, 2022

Searching for a home is exciting but it is also important to be aware of all the terms and legalities you will be dealing with. The title insurance process can be complicated, which is why it is important to differentiate each type of policy. Having this type of information is beneficial and can help clarify the title process. With this, a common question that pops up is, what is the difference between lender and owner’s policy?

In title insurance, there are two policies you will be dealing with – lender and owner. You can purchase both or just the lender insurance by itself depending on your attorney’s recommendations. Here are the benefits of each policy.

Lender’s insurance, also known as loan policy, assures the lender of the validity, priority, and enforceability of its lien (mortgage) – serving as protection for the lender’s security interest in the property. It protects the lender up to the amount of their outstanding debt on a mortgaged property. It is required by the lender to close. This insurance does not protect homeowner’s investment in the home. If someone was to sue with a claim against them, they are the one’s responsible. This insurance is required while owner’s title insurance is optional, but both policies are typically offered as a bundle together as a discounted rate.

Owner’s policy protects the homeowner from claims against the title that predates the purchase of the property. This insurance is critical because it protects them if a title issue arises during or after a home purchase. It is issued in the amount equal to the home’s purchase price and purchaser pay a one-time fee at closing. This insurance makes the insurance company responsible – subject to the terms of the policy – both legally and financially up the policy limit.

Although owner’s title insurance is technically optional, most attorneys recommend buying it for added protection and peace of mind. It’s purchased in an amount equal to the purchase price and does not terminate when the mortgage loan is paid in full or refinanced. It’s there to protect homeowners against losing their equity and right to live in the home if a claim arises after the purchase. It also helps when they want to eventually sell their property. If a title issue were to arise at this time, the policy will ensure that the sale will proceed by offering insurance to the new buyer or lender.

Yet, it doesn’t protect homeowners against all possible infringements on their property rights. It does not protect against title problems caused by one’s own actions. It also doesn’t protect homeowners against eminent domain, which is when a government seizes private property for a public purpose.

As a homeowner, you will need to understand the stages of buying a home and all the work that goes behind it. It sounds stressful but will all be worth it in the end. You do not want to be blindsided by terminology and be aware of what title companies are offering to you.