Understanding the Title Insurance Requirements for Your Mortgage Loan Closing
The title insurance policy is a one-time fee, which is usually split between you and the seller at the time of the purchase closing.
The title insurance is required by all mortgage lenders, and it normally contains two types of coverage:
- Mortgage lender’s title insurance coverage
- Owner’s title insurance coverage
In a typical purchase transaction, the seller will pay for the owner’s coverage, while you will pay for the mortgage lender’s coverage. [With refinances, the borrower will pay for both parts of the title insurance policy.]
Title insurance basically protects the mortgage lender and property owner from damages or losses that may arise from problems with the property’s title or ownership. Specifically, title insurance protects against title problems that the title company should have uncovered during their title search.
In plain English: the title insurance guarantees that the seller has full ownership of the property and full rights to transfer the ownership to you.
Prior to the closing, the seller’s attorney typically will order a title search and insurance policy from a title company. Some attorneys will conduct the title search and obtain title insurance themselves, although this is becoming less common. Upon completion of the title search, which examines the chain of ownership and all liens recorded on the property, the title company will issue a preliminary title report and insurance commitment.
The preliminary title report will list all liens currently on the property, clarify the actual owners and indicate any encumbrances or possible title problems, if any. If there are any liens (taxes, mortgages, judgments, etc.), they must be paid off before or during the closing. If there are any ownership problems, they must be resolved prior to or at the closing.
Lastly, all current owners recorded on the title must approve the sale of the property or accept any additional mortgage liens on the property.
Title insurance coverage is rarely ever activated. However, it is necessary protection and comes into play if there is ever dispute about true property ownership.
For example, if someone comes to your door and provides legal proof that the ancestors of the former seller had stolen the property from his ancestors, then they have the legal right to reclaim your property. Without title insurance coverage, you and your mortgage loan provider will have lost any funds invested in the property.
