Confused about the differences between lender’s title insurance and owner’s title insurance? Let’s put forward a scenario that all those looking for property in New Jersey will most likely encounter: you’re at your New Jersey property closing, and you’re reviewing your settlement statement. Everything looks great, except for one thing:
Why are there two different line items for title insurance on there? Do I need them?
The short answer? Those two line items are for lender’s and owner’s title insurance. Both forms of title insurance included in the closing process are very common in New Jersey, and it’s completely normal for buyers in the state to be a little confused about the differences, who pays for them, and their necessity in the real estate process. This is especially true in New Jersey, where there are very specific guidelines on who may order and pay for title insurance.
Cortes & Hay is here to help. Here, we’ll break down what each insurance covers, who pays for it, and whether skipping title insurance is ever a good move.
What is Title Insurance?
Let’s quickly refresh everyone on a basic question: What is title insurance? Put simply, title insurance offers the real estate purchaser protection against any defects or errors in the chain of title that may have occurred long before you purchased the property. Those errors can range from undiscovered liens and debts to forgotten easements and land disputes, and even fraud and forgery. Title insurance companies search the title history to uncover any of these errors and offer protection against title issues for as long as you own the property. The cost is a one-time premium paid at closing.
What is Lender’s Title Insurance?
Lender’s title insurance is one of the two line items you’ll likely see on that settlement statement. Also known as a loan policy or a “mortgagee policy,” lender’s title insurance is required by almost every lender as a condition of issuing a mortgage to the buyer. In New Jersey, the buyer typically pays for the lender’s title insurance as part of the closing costs.
The most important thing to know about a lender’s title policy? As suggested by the name, it protects the lender (not the buyer) up to the loan amount, with the coverage decreasing as the mortgage gets paid down. It protects the lender against undiscovered liens, judgments, or encumbrances from prior owners, along with errors in public records, forgery or fraud in the chain of title, competing ownership claims, and other title issues.
Another thing to know? It does NOT cover any financial loss that you, as the buyer, suffer; only the lender is protected. This is the key point most buyers do NOT know at closing.
What is Owner’s Title Insurance?
Owner’s title insurance (also called an owner’s policy) protects you, the property buyer. It offers you protection from:
- Title defects in existence before you purchased the property
- Liens and debts left by a prior owner (from a contractor, for example)
- Forged deeds, fraudulent transfers, or other malfeasance in the chain of title
- Errors in the public record, including the wrong legal description or indexing mistakes
- Claims from the unknown heirs of a prior owner
The other important things you should know about owner’s title insurance? It’s optional – it is not legally required – but it’s strongly recommended to provide you with the protection you need against title areas. The coverage amount equals the purchase price; this stays constant, or (in the case of property value with enhanced policies) actually increases. Coverage is paid in a one-time premium, and lasts for as long as you (or your heirs) own the property.
In New Jersey, the seller typically pays for the buyer’s owner’s title insurance policy. In a competitive buyer’s market, this is usually negotiable.
Lender’s Title Insurance vs. Owner’s Title Insurance: A Side-By-Side Comparison
Use this helpful chart as a quick reference guide to the differences between lender’s and owner’s title insurance. Use this as a quick reference to understand which type of title insurance is relevant to your real estate transaction.
| Insurance Type | Coverage | Who is Protected? | Cost Responsibility | Is it Required? |
|---|---|---|---|---|
| Lender’s Title Insurance | Protects against defects affecting the lender’s interest in the property | Lender | Typically paid by the buyer | Yes, required by lenders |
| Owner’s Title Insurance | Protects against defects affecting the owner’s interest in the property | Property Buyer | Usually paid by the seller | No, but strongly recommended |
Do I Need Both Lender’s and Owner’s Title Insurance?
The short answer? It’s highly recommended that you get both. If you’re purchasing a property, you’re likely to pay for lender’s title insurance; however, lender’s coverage does nothing to protect you personally. It only protects the mortgage lender.
Owner’s title insurance provides the extra protection you need to feel secure in your purchase. Imagine this scenario: five years after closing, a title defect (an unexpected heir, for example) arises. The lender’s policy covers the lender for the error, but without owner’s title insurance, you could lose your equity and your home. That’s the degree of protection owner’s title insurance provides.
The relatively low cost you’ll pay for the owner’s policy is well worth it for the peace of mind the coverage provides.
Enhanced vs. Standard Owner’s Policy in NJ
There’s something else future property owners should know about title insurance in New Jersey: enhanced title insurance. While the standard policy covers title defects that exist at closing, an enhanced (ALTA Homeowner’s) policy covers certain post-closing risks, like boundary disputes, building permit issues, and post-closing forgeries. Although the premium is slightly higher than that of a standard policy, it provides broader and more comprehensive protection. Be sure to talk with your NJ title agency about your enhanced policy coverage options.
What About Refinancing?
When you refinance a home, your lender will require a new lender’s title insurance policy; typically, it will cost less than the original purchase premium. Your existing owner’s policy will continue to provide your coverage. You don’t need a new owner’s title insurance policy for refinancing.
Frequently Asked Questions
1. What are the main differences between lender’s title insurance and owner’s title insurance?
Lender’s title insurance protects the lender’s interest in the property, while owner’s title insurance protects the buyer’s interest. The lender’s policy is required for mortgage approval and covers issues that could affect the lender’s investment. In contrast, the owner’s policy is optional but highly recommended, as it safeguards the buyer against title defects that could lead to financial loss or ownership disputes. Understanding these differences is crucial for making informed decisions during a real estate transaction.
2. How much does title insurance typically cost in New Jersey?
The cost of title insurance in New Jersey can vary based on the property’s purchase price and the type of policy. Generally, the premium for lender’s title insurance is based on the loan amount, while the premium for owner’s title insurance is based on the property’s purchase price. Buyers can generally expect to pay a one-time premium ranging from hundreds of dollars to several thousand dollars, depending on the policy and coverage level. It’s advisable to consult with a title agency for specific quotes tailored to your transaction.
3. What happens if I don’t purchase owner’s title insurance?
If you choose not to purchase owner’s title insurance, you risk facing significant financial loss if a title defect arises after your purchase. Without this protection, you may be liable for any claims against the property, such as undisclosed liens or ownership disputes. This could lead to costly legal battles or even loss of the property. While it is not legally required, for most buyers, the peace of mind and financial security provided by owner’s title insurance is invaluable.
4. What is an enhanced title insurance policy, and how does it differ from a standard policy?
An enhanced title insurance policy, often referred to as an ALTA Homeowner’s policy, offers broader coverage than a standard policy. While a standard policy protects against title defects existing at closing, an enhanced policy can also cover post-closing risks, such as boundary disputes and certain types of fraud. Although it typically costs more than a standard policy, the additional protection can be beneficial for homeowners looking for comprehensive coverage. Discussing options with your title agency can help determine the best fit for your needs.
5. Do I need a new lender’s title insurance policy when refinancing?
Yes, when refinancing your home, your lender will require a new lender’s title insurance policy. This policy protects the lender’s interest in the property for the new loan amount. However, your existing owner’s title insurance policy remains in effect and continues to provide coverage for you as the homeowner. Typically, the cost of the new lender’s policy is lower than the original purchase premium, making it a more affordable requirement during refinancing.
6. How long does owner’s title insurance coverage last?
Owner’s title insurance coverage lasts for as long as you or your heirs own the property. Unlike other types of insurance that require ongoing premiums, title insurance is a one-time payment made at closing. This means that once you purchase an owner’s title insurance policy, you are protected against future title defects, ensuring peace of mind throughout your ownership of the property.
Lender’s Title Insurance and Owner’s Title Insurance: What You Should Take Away
The bottom line with lender’s title insurance and owner’s title insurance? Remember that lender’s title insurance is mandatory but protects your lender—not you. Owner’s title insurance is the policy that protects your investment and is always a good idea during the real estate process. For buyers in NJ, both are typically issued at the same closing.
Ready to get started with title insurance? Have any questions? Contact the professionals at Cortes & Hay to learn more about your title insurance options in New Jersey.