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Coverage and Types of Title Insurance Policies

There are two types of title insurance polices, the owner's policy and the lender's policy. When you buy your home you will arrange to buy title insurance which will cover your interest in that property. The limit of this owner's policy will generally be for the market value of the house at the time of the purchase. If you will be obtaining a mortgage on the property, your lender will require a lender's policy to protect their interest in the property. The lender's policy will be written for the amount of the mortgage.

You may be wondering why two policies are necessary to insure the same piece of property or you may be wondering if you have to pay two separate title insurance premiums. In most cases, you will pay for the two policies together and this cost will be a discounted price.

The owner's policy will cover losses or damages you suffer if it is found that the property belongs to someone else, or if there is a defect or lien on the title, if the title is unmarketable, or if there is no access to the land. Your owner's policy will have a section setting forth what is covered as of the effective date. It will guarantee that your ownership is free from defects or encumbrances, except any listed as exceptions in the policy, it will guarantee you have access to the land, and it will guarantee that you have the legal right to sell the property and convey marketable title to a new owner. If you buy the property for $100,000, then the owner's policy will be written for the full amount, $100,000.00.

The lender's or mortgagee policy, on the other hand, protects the lender for the amount of their loan. If they loan you $80,000.00 on your house, then their policy will be for that amount only, $80,000.00. This type of policy is called the ALTA policy and is a standard policy approved by the American Land Title Association. It is issued to banks and other institutional lenders.

In addition to covering the lender for the losses included in the owner's policy, the lender's policy includes coverage for any losses that the lender would incur if another creditor were first in line. If, for example, you were to take out a second mortgage and had managed to keep this second loan hidden while refinancing your first mortgage, the second mortgage would take first place in the event of a foreclosure action. The lender's title insurance policy would cover the mortgagee of the first loan if this were to occur.

When an owner's and a lender's policy are issued at the same time, or concurrently, the premium is less expensive than if the two polices are issued separately. Since the title insurance company only has to search the records one time, and because a concurrent policy doesn't increase the risk that much, the concurrent policy premium will generally cost about one-third less than two separate policies.

If there were to be a loss, the title company would be liable to the owner for the amount of their equity, in this case, $20,000.00 and to the lender for their value of their mortgage, $80,000.00 for a total of $100,000.00. With $100,000 of coverage, the title insurer has covered both policies.

The costs of the owner's and the lender's policies will vary depending on the location. The costs may vary from state to state, or county to county, or even from one company to another. Before choosing your title company or closing agent, inquire as to the prices they charge for a title insurance policy. Ask for the lowest rate allowed by law, and keep shopping for a lower rate if your closing agent will not negotiate on their fees.