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What Is the Difference Between an Owner's Policy and a Mortgagee Policy?

During a home purchase, ensuring peace of mind is an important part of the real estate transaction. It's advisable, and often required, to also obtain title insurance for the new home. Title insurance protects either the new owner or the mortgage lender. It safeguards against title problems in cases where a dispute arises about who holds legal title to the property.

Should it later be proven that the title passed to the owner was invalid, title insurance will cover the cost of the property. Essentially, this policy protects you against unforeseen legal actions involving title issues. There are different types of title insurance policies:

  • The owner's title insurance policy
  • The mortgagee policy or lender's title insurance

Below, you will learn about these differences. We'll cover important details on title insurance to help you make the right decision for your needs.

Owner's Policy

Owner's policies are advisable but typically not required. The owner's policy will protect you, the purchaser of the property,, if the title passed to you:

  • Is invalid
  • Is encumbered with a prior debt, lien, or other encumbrance
  • Has issues that affect the land's value, such as access to the land

This final situation can occur when one can only enter and exit their land through another's land. For example, title problems can arise when access only exists through a driveway crossing another's property. Remember that property owners can remedy such situations through easements. An owner's policy would shield you from liability if no easements were in place before the purchase.

Mortgagee's Policy

This type of policy protects the lender. Banks will almost always require a home buyer to obtain this type of policy in order to obtain a mortgage. Sometimes, a borrower may also be required to purchase a new policy during refinancing. Whether you're borrowing for the first time or refinancing an existing loan, the policy's cost might be rolled into payments on one's mortgage. These policies offer the same protections as an owner's policy, such as the protections against an invalid title. But they cover the bank's interest instead of yours. That is, the policy insures only the mortgage loan lender against losses.

For prospective home buyers, obtaining both types of policies is advisable, especially if there is any possibility of a clouded title. The buyer should check with multiple insurers to see if obtaining both policies from the same insurer is possible. This will significantly reduce the title insurance company's cost of investigating the title history. It also may reduce the insurance premium (a one-time fee) of the policy to the homeowner. Ultimately, the title insurance or loan policy cost will vary depending on several factors, including the:

  • Available private and public records upon title search
  • Legal rights owned and transferred by previous owners
  • History and location of the property
  • Purchase price and potential delinquent matters like unpaid property taxes

Title insurance costs can also be affected by local and state laws. Check with your state's insurance department for regulations specific to your area.

Limitations

It's also important to note that these policies differ from homeowner's insurance. Title policies merely address the possibility of disputes regarding one's legal ownership of the land. In other words, title insurance covers pre-existing title defects that may be unknown. It doesn't cover losses incurred from events that happen after the sale.

For instance, a lender's title insurance policy doesn't protect against financial losses from fires and natural disasters. An additional policy would be required if such protections are desired. Read our page on Home Insurance Coverage Issues to learn more about what different policies cover. Alongside consulting with your real estate agent, this will help you make the right decision for your family.

Get a Handle on Your Homeowner Legal Concerns With a Free Attorney Match

While it's easy to get confused about homeowner insurance policies, you'll want to know exactly how much coverage you have and what to expect before a crisis hits. A real estate attorney with experience in homeowner's insurance can help. They can explain the difference between an owner's policy and a mortgagee policy, ultimately helping you make the right decisions. You also may benefit from speaking with an insurance lawyer.

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