Buying a house is a stressful process with plenty of new terms and information for buyers to learn. People closing on a new property have to pay certain costs as part of that transaction, one of which is title insurance.
Many people find title insurance confusing, as they don’t understand what it actually protects them from. There are two main kinds of title insurance, and both of them relate to whether or not your purchase of the property and future ownership of it are legally valid.
Lender’s title insurance protects against losses due to mortgage funding
When you purchase a home, the chances are quite good that you will not pay the entire price upfront. Most people finance 80% or more of their home purchase.
That is one reason why banks take so much time to do inspections and verify the value of a property before they fund a mortgage. They don’t want to lose their investment if you end up losing the property. If someone with a valid title claim appears, the lender’s policy will cover the outstanding principal on the mortgage if you lose the property.
The homeowner’s policy protects your ownership and money
You generally don’t have the right to refuse a lender’s policy, but you may be able to waive the coverage for you as the homeowner. However, doing so is a gamble.
While title claims are rare, if someone with a valid claim to ownership of your property appears, you could lose out on your down payment and all of the equity you’ve accrued in the home. Your title policy will cover the cost of an attorney to defend your title and the financial investment you have made in the property since closing.