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What Is Title Insurance For A Mortgage Loan And Why Is It Required?

By Bob Redtree

How well do you know about title insurance and why a mortgage loan requires it? Read on to see what you can find useful if you’re in a real estate transaction.

Title insurance, along with homeowners insurance, is often required to obtain a mortgage loan. Similar to a homeowners insurance that protects the mortgage lender against potential damage to the collateral of its loan, a title insurance protects the lender against any loss on the same mortgage lien due to title defects and thus potentially unable to enforce the lien on a property to which the title as vested in the owner/borrower is later found invalid.

Definition of Title Insurance

A title insurance is an indemnity insurance issued by a title insurance company that assures the policy holder, the home buyer/borrower (for this article’s purpose), that his or her title to the property from the transaction is free from all defects, prior liens, or any other encumbrances, except those exempted from the policy. Such a policy also covers potential legal expenses for defending any future lawsuits that challenge the policy holder’s rightful title to the property.

Importance of Title Insurance

Maintaining an accurate record system for all property transfers by appropriate authorities can be enormous and errors are sometimes made understandably. That searching through all the records to make sure what the seller claims about the title to the property in question is free from any errors is in the best interest of the buyer. Title insurance companies are uniquely suited for that kind of complicated investigating work because of their expertise and efficiency. Premiums collected are actually used to a large extent to cover the expenses from conducting such title searches, rather than paying for potential future losses. The main purpose of title insurance is try to eliminate such losses, as home buyers and mortgage lenders alike do not expect money compensation or litigation later over undiscovered mistakes and unexpected defects.

Mortgage Loan and the Validity of its Lien

A mortgage lender has as much interest in a clean title as the home buyer/borrower does. Any potential future disputes over its mortgage-loan borrower’s title to the property when it’s already secured by the mortgage lender as collateral will compromise the lender’s ability to protect its own financial interest, including in the event of a foreclosure, as the lender could lose its lien position on the property and hold no valid collateral against its outstanding mortgage loan. A mortgage lender would underwrite a mortgage loan only on a property to which the borrower claims a title that is backed up by a title insurance.

Related posts:

1. What Is Mortgage Loan Insurance?
2. How Much Of A Down Payment Is Required For An ARM Loan?
3. What Type Of Insurance Do I Need When Getting A Home Mortgage?
4. How Much Does Mortgage Loan Insurance Cost?
5. Is A Mortgage A Lien?