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Why do home buyers often have to pay for 2 title insurance policies?

On Behalf of | Apr 14, 2024 | Real Estate Law

Buying a home is often a smart investment. The acquisition of real property takes a fixed cost that is already necessary in the form of rent and converts it to an asset. By making payments on a mortgage, homeowners accrue equity instead of just losing that rental payment every month.

Of course, buying real property is a major commitment. A potential homeowner has to offer a competitive price and will be solely responsible for repairs and maintenance once a property is in their name. They may also experience sticker shock after receiving a settlement statement before their closing.

There are numerous closing costs that buyers typically need to cover which may add up to tens of thousands of dollars for higher-value properties. Oftentimes, buyers discover title insurance premiums on those documents. Most buyers have to buy not one but two title insurance policies. Why are two policies often necessary when buying a home?

The lender and the buyer both need coverage

Unless someone comes to the table making a cash offer, they have to make certain concessions to their mortgage lender throughout the transaction. Lenders often insist on inspections and appraisals. They also expect the buyer to pay for certain types of insurance.

Buyers have to carry homeowner’s insurance on the property. If they don’t have a 20% down payment, they pay for mortgage insurance. They also have to pay for a lender’s title insurance policy. That policy pays the lender back for the amount financed if there is a successful title claim against the property later.

Buyers do have the option of giving up their title policy. However, that would leave them in a situation where they could lose their home and the investments that they have made in it after a surprise claim against the title. A buyer’s policy can help them pay for an attorney to respond to a title dispute. It can also compensate them for their down payment, property investments and equity accrued if the courts rule in favor of a party bringing the title claim against the home.

Buyers who are familiar with the obligations of a real estate purchase may feel less shocked by closing costs. Knowing what triggers some of the biggest expenses on a settlement statement can help people feel more confident about moving forward with a transaction.