When you purchase a home, you fully expect to have complete, undisputed ownership of the property. It’s yours; you invested the money and took out the loan, so no one can take it away from you.
Unfortunately, there can, in rare cases, be problems with titles to the property, creating a fallout for homebuyers. These problems can simply be human errors or omissions in the deeds. They can be mistakes that happened while examining records, or they could come from direct forgery.
Or they could be caused by undisclosed heirs. For example, what if you purchase a piece of property from an estate, only to find out a year later that a long-lost brother now claims the property was also his? According to him (and his attorney) the sellers had no right to move the property without his involvement. He could, essentially, claim that the property you live on is actually his.
While rare, issues with a title create major problems.
To protect yourself against these problems, you’ll need title insurance, which generally comes in two types: owner’s and lender’s policies. There is also a third option, called a title binder, which may be used for short-term owners.
Lender’s Title Policy vs Owner’s Title Policy vs Title Binder
Lender’s Policy (aka Loan Policy)
The lender’s policy is intended to protect the financial institution writing the loan, and not necessarily the buyer purchasing the property. The loan policy is typically based on the total amount of the loan, and it protects the lender’s financial interest in the property if a problem comes up with the title. Unfortunately, it does not protect the buyer. The policy amount will decreases as you pay down your loan, and eventually disappears when the loan is paid off, as the lender no longer has a financial interest in the home.
The lender’s policy might protect the owners of the property in certain circumstances, but it is specifically designed to protect the lender from financial loss. Once the loan is paid off, the lender’s policy provides no protection for the owner.
Owners’s Title Policy
An owner’s policy is a type of title insurance that is issued in the amount of the real estate purchase. For a one-time fee, which is usually due at closing, the title insurance protects the owner for as long as they own the property. This insurance protects property owners against loss or damage they might meet because of liens or defects on the title. The policy could also provide financial or direct support for defense in court against claims raised against your property.
The owner’s policy provides the owner of the home with protection against loss from title defect of a claim by another person who feels they have a right to ownership. Only with the purchase of an owner’s policy will you have complete assurance that your title is covered for as long as you own the property.
Title Binder (aka Interim Binder)
Lastly, there is a component of the real-estate sales process called a “title binder,” which is also referred to as an “interim binder.” This is not actually a title insurance policy, but a commitment to issue a policy in the future. These are often used when a person intends to live in the property for a short time or wants to “flip” the house for a profit. This is a cost-saving tool that could be useful if you will only own the home for about two years.
Every time a home is sold, the buyer incurs costs to have the title searched and verified. This is done to make sure the title is clean and that no problems will arise in the future. For a cost, the title is insured, but by purchasing a title binder at the start of ownership, you can avoid the cost of title fees. This savings happens because the buyer can then resell the property and have a policy of title insurance written when the next buyer comes along, and the policy is then written at a fraction of the price.
Here’s how it might work: suppose you are an investor who decides to purchase a “fixer-upper.” You would then purchase a title binder. After you bought the property, purchased the title binder, and fixed up the property, you would be ready to sell. Now you would work with the same company that offered the title binder and have the title policy written, all without the higher costs of a new title policy.
Essentially, instead of having the title checked when you buy and when you sell, with a title binder you can simply purchase the property and have the title checked when you sell.
The binder was designed to help with special circumstances and can’t be used in every transaction. Typically, they are created under terms around two years, but some companies will offer an extension for another year, although there will be an added cost for this extra time. In all cases, the same company that issued the binder will be the one issuing the title insurance once the next sale is made.
In most cases, the seller of the property will pay for the buyer’s title insurance, and the title binder provides a way to avoid duplicate costs. The binder essentially provides a way to obtain coverage during a period set forth in the title binder, then sell the property and provide insurance to the next buyer, which can all be done at the price of a single policy plus the binder’s fee, which is less than two policies. For this reason, the binder is a cost-effective measure for anyone who plans to sell a home in a short timeframe.
It bears repeating, however, that the interim binder is not insurance, but merely a commitment to buy insurance in the future. They are for buyers, not lenders, and are issued in replacement of an owner’s policy, not a lender’s policy.
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