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What Is Mortgage Title Insurance? The Basics Explained

Monday, August 10, 2020

You purchase a home and have a title saying you own the property. How do you know your investment is secure?

What if someone claims they have an outstanding lien for construction work on your home?

What if you are sued because someone has an inheritance claim against your home?

In February 2019 NBC Philadelphia announced a 70% spike in the number of people claiming they were victims of deed fraud. Deed fraud is when someone sells a home claiming to be its owner, but does not have permission from the real homeowner to do so.

When you buy a home there are two types of mortgage title insurance that can be purchased. One is mandatory, one is optional. We are going to explain what they are, what each cover, and how long that coverage lasts.

What Is Mortgage Insurance?

Lender’s mortgage title insurance protects the mortgage lender. The owner’s mortgage title insurance protects the owner of the home. Policies offer numerous options and it is important to understand what is available when making a decision on what policy to purchase.

Lender’s Title Insurance

This type of insurance is mandatory when real estate is purchased on a loan. The buyer is required to purchase insurance that provides protection to the mortgage lender. This protects the lender's investment if a claim is made that someone else owns the property or has a lien against it.  

The mortgage lender is the only beneficiary of this policy. The only time this insurance is not required is if the purchase is a cash sale.

Owner’s Title Insurance

This type of insurance is optional. The buyer has the option of purchasing this insurance for their own protection. This covers the owner against claims made regarding their right to ownership of the home.

The buyer is the beneficiary of this policy. This insurance is not required but is highly recommended.

How Mortgage Title Insurance Works

When purchasing a home or property you will likely have a real estate team helping you prepare for the closing. This will include the real estate agent, a real estate attorney, a mortgage lender, a home inspector, and a title insurance agent.

The insurance company takes steps to make sure that the title they are guaranteeing has no hidden problems. An attorney or title company will conduct a title search on the property. The purpose of this search is to reveal any liens that are still held on the property.

While the search is thorough, it is always possible a hidden record is missed. This could cause the sale to later be determined invalid. Mortgage title insurance provides coverage against that loss.

Why Do I Need Both Types of Insurance?

Title insurance protects the rights of either the lender or you. There is no time frame on when claims from fraud, human error, unknown liens, or an heir claiming ownership can be made. You need to make sure your equity in the home is covered.

Lendor’s Insurance Coverage

Title insurance in Pennsylvania is mandatory unless you are paying for the home in cash. The lender’s insurance coverage is only active up to when the loan is repaid or refinanced.

There are certain things that title insurance in Pennsylvania does not cover, including liens not filed prior to your purchase of the policy. Also not covered are problems with easements or mistakes made in establishing property boundaries.

The mortgage lender is the only beneficiary of this policy. You as an owner do not benefit from any claims filed on this insurance.

Owner’s Insurance Coverage

The owner’s policy is highly recommended. The one-time fee provides coverage for the entire time you own the home.  Because there is no guarantee on how long it may take someone to claim they have a financial interest or ownership in your property, the investment of a few hundred dollars for coverage is reasonable.

You receive protection against issues with the chain of title and encumbrances on the property. You are the beneficiary and receive any payment from claims filed against this insurance.

Extended Coverage Options

When shopping for a title insurance policy there are standard policies and there is also enhanced coverage. Compare what that extra coverage can get you and determine if the additional cost fits your needs.

Enhanced coverage far exceeds standard policy coverage. That includes lifetime coverage, post-policy living trust coverage, subdivision law violations, and coverage for boundary wall or fence encroachment. 

Other areas of coverage include areas that can have a huge impact on your ability to enjoy your homes such as discriminatory covenants, maps that do not match the legal description, or your inability to access the property on foot or by car.

Who Pays for Mortgage Title Insurance

The purchaser of the property is obligated to pay the lender’s title insurance. The buyer also pays for the optional owner’s insurance coverage. When considering the cost of a home, title insurance is very reasonable.

As of February 2019, title insurance costs in the U.S. averaged $900 for a $400,000 mortgage. It is the difference in the policies and who they benefit that makes this decision important.

The mortgage company requires a policy to be purchased every time a new mortgage is issued. The lender is the only beneficiary.

An owner’s policy protects the buyer. The coverage period is for as long as the purchaser owns the property and does not have to be re-issued when the home is refinanced. Its coverage is continuous until ownership changes.

The cost of insurance is based on the cost of the property, where the home is located, and the insurance provider’s rates. It is easy to review the cost of insurance and calculate your policy cost.

A Worthy Investment

When purchasing a home, the cost of mortgage title insurance is a worthy investment. The alternative is the risk of losing your home and any equity you have. Heartland Abstract can provide you with the title policy that fits your needs and brings you peace of mind.

Not only does title insurance give you confidence in knowing you have clear ownership of your property, but it is also reassurance that there will not be any problems should you decide to sell your home in the future.

If you have any questions about our coverage or the details of our policies please feel free to contact us (610) 326-6300. We want to talk to you today!

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