What is title insurance?

There are two types of title insurance policies - owner and lender.

Owner's policy

The owner's policy assures a purchaser that the title to the property is vested in that purchaser and that it is free from all defects, liens and encumbrances except those listed as exceptions in the policy or are excluded from the scope of the policy's coverage. It also covers losses and damages suffered if the title is unmarketable. The policy also provides coverage for loss if there is no right of access to the land. Although these are the basic coverages, expanded forms of residential owner's policies exist that cover additional items of loss.

The liability limit of the owner's policy is typically the purchase price paid for the property. As with other types of insurance, coverages can also be added or deleted with an endorsement. There are many forms of standard endorsements to cover a variety of common issues. The premium for the policy is usually paid by the seller, but is up for negotiation in the purchase contract. Title insurance coverage lasts as long as the insured retains an interest in the land insured and typically no additional premium is paid after the policy is issued.

Lender's policy

This is sometimes called a loan policy and it is issued only to mortgage lenders.  Just as lenders require you to have fire and other types of insurance coverage to protect their investment, nearly all institutional lenders also require title insurance [a loan policy] to protect their interest in the collateral of loans secured by real estate.  Generally speaking, it follows the assignment of the mortgage loan, meaning that the policy benefits the purchaser of the loan if the loan is sold. For this reason, these policies greatly facilitate the sale of mortgages into the secondary market. That market is made up of high volume purchasers such as Fannie Mae and the Federal Home Loan Mortgage Corporation as well as private institutions.

The American Land Title Association ("ALTA") forms are almost universally used, though they have been modified in some states. In general, the basic elements of insurance they provide to the lender cover losses from the following matters:

  The title to the property on which the mortgage is being made is either:

  Not in the mortgage loan borrower,

  Subject to defects, liens or encumbrances, or

  Unmarketable.

  There is no right of access to the land.

  The lien created by the mortgage:

• is invalid or unenforceable,
• is not prior to any other lien existing on the property on the date the policy is written, or
• is subject to mechanic's liens under certain circumstances.

As with all of the ALTA forms, the policy also covers the cost of defending insured matters against attack.

Of course, all of the policies except or exclude certain matters and are subject to various conditions.

The Buyer pays for the Lenders Title policy, as it's only needed if the Buyer has a loan.  The amount for coverage is based on the loan amount.