Lender's title insurance: FAQs
Planning to finance your home purchase? Your lender will require you to purchase a lender's title insurance policy in order to close.Looking to refinance your current home? You'll have to purchase a new lender's title insurance policy, also known as a loan policy. Wondering why? Read on to learn the importance of lender's title insurance.
Why do I need a new title insurance policy for a refinanced loan?
To the lender, a refinance loan is no different than any other home loan. So your lender wants to insure that the new loan is protected by title insurance, just like the original lender required on your previous loan. When you bought your house, you bought a policy for both yourself (an owner's policy) and the lender (a lender's policy), but when you refinance, you are only buying a new title for the lender (a lender's policy).
Why does a lender require title insurance for loans?
Typically, once a lender buys your loan, they immediately sell it to secondary market investors. In order to protect its security interest in the loan, these secondary investors require that the loan has lender's title insurance. Lenders are protecting their investment against title related defects.
When I purchased my home, wasn't I required to buy a lender's policy?
Yes, you bought a lender's policy when you bought your house. However, unlike the owner's title policy which doesn't expire until you (or your heirs) sell the house, the lender's policy expires when the loan is paid off. When you refinance, the original loan is paid off and a new loan is issued, therefore requiring a new lender's title policy.
When does a lender's title insurance policy expire?
A lender's title policy expires when the loan is paid off.
What may have happened since I bought my house to warrant a new lender's policy?
Since the original loan was issued, you may have taken out a second mortgage, had mechanic's liens, child support liens or legal judgments recorded against you, which are all issues that could result in a financial loss to the lender. Even if it has only been six months, there are still title defects that could arise. So the only way for the lender to protect their investment, is to require a new lender title policy with each new loan.
About how many claims are made with title insurers?
According to American Land Title Association (ALTA), title insurers paid approximately $460 million in claims in 2001. This figure was up over $100 million from $350 million in 2000. Compensation was paid to insured homeowners either for losses they experienced under policies issued to them or to defend their titles from the claims of others.
Generally speaking, homeowners assume there are rarely problems with titles; however, title problems arise in one out of every four real estate transactions, according to an ALTA survey of 420 abstractors and agent operations. In 2001 this would mean that 1.6 million of the 6.5 million residential real estate transactions had a problem with the title.