DEAR MR. MYERS: We are buying our first home. Our mortgage broker says that we must purchase a title-insurance policy that protects the bank if a dispute arises, but she's also urging us to buy a separate policy that would cover our own interest in the home. Are two title insurance policies really needed, or is our mortgage broker just trying to pad her commission?ANSWER: No, your broker isn't trying to boost the commission that she will make when the loan is approved. Instead, she is wisely suggesting that you purchase a second title-insurance policy so that your own stake in the home will be protected if someone else files a lawsuit that claims ownership of the property.
Most first-time buyers, and even some experienced investors, don't really understand how title-insurance works. ": title policy basically protects the holder from a loss sustained by a "defect in title." For example, if you buy a house today and someone (a stranger or even a long-lost uncle) sues two years later because he or she has a deed to the property signed by a previous owner, the home could be taken away from you if the claim is upheld by the court.
There are two types of title-insurance policies. The first, "lender's title insurance," protects the bank against any future claims regarding ownership of the property. Almost every lender requires borrowers to pay the $600 or so for such coverage before making a loan, even though the policy will only reimburse the bank - not the buyer-for losses if a Claim is made months or years later.
Should you want the same type of protection that the bank demands, you will heed to pay another $500 or so for a separate "owner's title insurance" policy that can reimburse your personal financial losses (and maybe even your legal fees) if a title claim proves successful.