Lender’s Title Insurance is required when you buy a new home and close on that mortgage loan. The title company does a search to make sure the title is clear of all encumbrances and possible issues. They insure your title for the life of the loan with lender’s title insurance.
No lender will give final approval on the loan without having their money protected. They are not going to lend hundreds of thousands of dollars and put that at risk. They require the title insurance to be in place for closing.
Let’s say that 10 years later, there is another individual who has the same name as you in the U.S. That person fails to pay their IRS taxes. They move around a lot. The IRS wants to find them and make them pay back taxes. They do a search using your name and find five people who own property. They place a tax lien on all the properties. They are erroneous liens on all the innocent homeowners, including you. You never even know about the lien, until one day…
You decide to refinance into a lower rate. The title company does a search and the false tax lien is on your property. It is not you! The title insurance company uses your information (such as date of birth, social security number) to prove to the IRS that it is not you and removes the tax lien so that your new refinance can proceed and close.
As a mortgage broker for 23 years, I have seen that scenario a lot. Sometimes the lien is not the IRS but another type of bill that was never paid. A contractor who did remodel work and failed to get paid might place a lien on the wrong person’s property. Not unusual. I’ve seen that a lot and the title company gets it removed.
Especially when a person has a common name, several false liens can pop up. As a loan officer, I have even called the attorney and gotten liens removed for a client named Smith myself when the title company was busy and too slow for my liking. The title insurance protected the owner from that lien that belonged to a different Smith.
Another scenario is a false heir popping up and claiming to have inherited the property. I have also seen that. The title insurance company protected the rightful owner from this person who claimed to have ownership in the property. The owner had purchased title insurance from First American Title more than 20 years prior when he bought the house. First Am got the bogus heir’s false filing off of the property.
Owner’s Title Insurance protects you as the owner for as long as you own the property, even after the mortgage is paid off.
Lender’s Title Insurance and Owner’s Title Insurance go hand-in-hand and it is important to purchase both. It is worth the one-time cost.