October 10, 2017
October 10, 2017
If you’ve got a new mortgage within the past few years, you may be vaguely familiar with title insurance. It’s typically a requirement anytime you get a new mortgage, whether it’s to purchase a new home or to refinance an existing loan. However, owner’s title insurance isn’t typically a requirement, but you should probably get it anyway.
Any time a new mortgage is taken on a home, the lender will require that a title search is performed. A title search is conducted by a title company. It is done to determine if there are any liens against a home. It will show the obvious liens, such as the first mortgage that you are refinancing, and perhaps a second mortgage or home equity line of credit if you have one.
Lenders already know about those liens, so that’s not the primary purpose of running a title search. The actual purpose is to determine liens that may not be known, even to you as the homeowner.
It’s possible for liens to be placed on a home without the owner being aware. This can happen in a situation where an account goes into collection, and the lender secures a court judgment. They can then attach a lien to your home. Another situation is what is known as a “mechanics lien.” A person does work in your home, and he can place a lien on your property if you fail to pay the bill.
Still another possibility is an IRS or state tax lien. If you have an unpaid income tax liability, the tax authority can place a lien against your home. They generally won’t do this if you have an installment plan or other settlement in progress. But if you don’t, or if you violate the terms of the installment plan or settlement, a lien can be placed on your home.
In most cases, you will receive notice of the lien. But given that people receive so much junk mail, it’s entirely possible that the notice of lien is either discarded or lost. In that case, there could be a lien against your property that you don’t know about.
The purpose of a title insurance policy is to provide coverage in case the title search fails to identify one or more liens on your home. It’s a fairly rare outcome, but it does happen, which is why title insurance is required. Title insurance will cover any liens that may have existed as of the date of the title search but were not discovered.
Lenders require this type of insurance because it is not possible to place a mortgage on a home unless the homeowner can deliver “clear title.” That means the property has no outstanding liens against it, other than those that will be paid with the new loan.
If there were no title insurance, it would be impossible for you to either sell your home or refinance it was there and undiscovered lien. But because of the title insurance, and the fact that they will cover that lien, the sale or refinance can go forward.
There are two types of title insurance, lender’s title, and owner’s title. The one that you are required to have at closing is lenders title. That will enable the lender to clear title to your property, no matter what happens. However, that policy ensures the lender, not you as the owner.
That’s when owner’s title insurance comes into the picture. It’s the type of title insurance that specifically means you, not the lender, is the beneficiary of the policy. If a lien shows up that was not discovered by the title search, you would be covered by owner’s title, and thus free to either sell or refinance your home without delay.
The combination of both owner’s title and lender’s title insurance may smack of double coverage. And in a real way, it is. One covers the lender against undiscovered liens, and the other covers you, as the homeowner, against those same liens.
Why should you have both? Mostly so that you’re free to do what you want when you want, whether that’s selling your home or refinancing it.