There are three types of title insurance, with each type covering different areas.
1. Basic lender's policy (purchased by banks and other lenders)
Lender's title insurance is a requirement in most states to close on a mortgage. But the lender's version only protects the lender up to the amount of the mortgage, and it doesn't protect your equity in the property. It will cover the following:
- Mechanic's liens and unrecorded liens
- Unrecorded easements and access rights
- Defects and other unrecorded documents
2. Basic owner's policy
Owner's title insurance fully protects you if a problem surface with the title that was not uncovered during a title search, and it pays for any legal fees involved in defending a claim against your title to the property.
Owner's title insurance, issued in the amount of the real estate purchase, can be bought for a one-time fee and lasts as long as you or your heirs have an interest in the property.
The parameters of an owner's policy vary by state. An owner's title insurance policy may protect the full value of your home, including your equity, for only a couple hundred dollars. In some states, home sellers will pay for owner policies to make good on the title to the buyer. And sometimes borrowers must buy it as an add-on to the lender's policy.
Here are examples of what will be covered in the policy:
- Title to the property
- Incorrect signatures on documents
- Forgery, fraud
- Defective recordation
- Restrictive covenants
- Encumbrances or judgments against the property
3. Extended owner's policy
The most basic extended coverage policy occurs when the standard exceptions have been removed. To get the standard exceptions removed or modified, the purchaser of title insurance must meet criteria that the insurer sets for each standard exception.
In addition to the basic extended coverage, endorsements to the title policy can be added to the coverage to protect against additional risks. Some of these additional risks could include the following:
- Building-permit violations
- Subdivision maps
- Covenant violations
- Living trusts
- Structure damage from mineral extractions
- Encroachments and forgeries after title insurance is issued
Title concerns for new home construction
Construction of a new home raises special title concerns for both the lender and owner.
You may think you are the first owner when constructing a home on a purchased lot, but there may have been prior problems with the land that were never addressed. For example, If the land was a dumping ground for contaminants by the local chemical company, or if the home sits on a floodplain. A title search will uncover most of this information, including any existing liens, and a survey will determine the boundaries of the property being purchased. Also, if the builder fails to pay subcontractors and suppliers, title insurance covers you against any lien on the property.