There are two types of title insurance policies that you should be familiar with when purchasing or refinancing your home.
1. Lender's Coverage
Whenever you borrow money from a Lender to finance the purchase of your property or to refinance an existing loan, your property is used as collateral for the loan. This means that the Lender places a lien on your property so that if you do not pay the loan according to its terms, the Lender can foreclose on the property and sell it to satisfy your loan obligation. Because of this, it is important to the Lender that you have good and clear title to your property. If it is necessary for the Lender to foreclose on your property, the Lender must be certain it will be able to easily re-sell the property to satisfy the loan.
To protect itself against the chance for there to be hidden defects in your title, the Lender requires that you purchase a Lender's Policy or Loan Policy of title insurance. This type of policy insures the Lender against any undisclosed defects in your title and provides protection to the Lender in case a defect is later discovered.
A lender's title insurance policy typically insures the Lender for the amount of your loan. The Lender requires that you pay the Loan Policy Premium associated with the Lender's Policy at the time of settlement and this Loan Policy Premium will be shown on Line 1104 of the HUD-1 Settlement Sheet and Closing Disclosure. Each time you refinance your property or take out a new loan on your property, you will have to purchase a new Lender's Policy of Title Insurance.
2. Owner's Coverage
Through Owner's Coverage, you too can receive the same protection as the Lender. Whereas the Lender's Coverage protects and insures the Lender against any defects in your title up to the amount of the loan, the Owner's Coverage protects your interest in the event that a claim is made against your title to the property. To put it another way, if a claim against your title is made and it is determined that you do not have the ownership interest in the property that you believed, the loan policy will make the Lender whole by paying the Lender up to the face amount of the policy. However, unless you have also purchased Owner's Coverage, any equity that you have in the property could be lost.
The premium for the Owner's Policy of title insurance will be shown on line 1103 of the HUD-1 Settlement Sheet and Closing Discloure and will be collected at the time of settlement. As opposed to a Lender's Policy, which must be purchased every time you refinance your property, an Owner's Policy must only be purchased one time and will remain effective regardless of how many times you may refinance your property. Also, although the lender will require that you purchase a Lender's policy of title insurance, it is your decision as to whether you will purchase an Owner's Policy. However, if you purchase an Owner's Policy at the same time that you purchase the Lender's Policy, you will be entitled to a "Simultaneous Issue" rate, which will be less than if you purchased the two policies separately.