• A lender’s policy is a type of title insurance that protects the lender’s interests against title defects, covering up to the outstanding loan balance.
• The one-time premium for a lender’s policy is paid at closing, and the policy remains effective until the mortgage is repaid or refinanced, with no additional costs.
• The policy does not offer direct protection to the buyer, exclusively safeguarding the lender’s investment against issues like fraud, unknown liens, or undisclosed heirs.
• Coverage decreases as the borrower repays the loan, expiring once the loan is paid off entirely.
• When refinancing, borrowers typically need to purchase a new lender’s policy, even with the same lending institution, as policies are not transferable between loans or lenders.

If you’re a buyer, you typically[1] need a lender’s policy to purchase a home. If you’re a lender, you need a lender’s policy to protect your interests when issuing a loan to a buyer.

This insurance policy stays active until the loan is fully repaid, safeguarding the lender’s investment against future title-related issues.

A lender’s policy is essential for the lending institution because it reduces risk, covers the loan amount, and provides security against potential legal disputes or ownership claims on the property.

For instance, problems may arise after the transaction is complete, like discovering undisclosed heirs or unknown liens against the property. In such cases, if the borrower defaults, the lender’s policy protects the lender from financial loss, ensuring they can recover from the money they loaned to the buyer.

RELATED: How to Find Out If There Is a Lien On a Property

A lender’s policy has several key components.

Coverage

The coverage amount of a lender’s policy is typically based on the loan amount. It protects the lender up to the outstanding loan balance[2].

The lender’s policy primarily covers the lender against unexpected issues like another party claiming ownership, fraud, or problems with the property’s title not found during the initial title search. This protection allows the lender to reclaim the loan amount if the borrower defaults and the property’s value decreases due to these issues.

The coverage amount of a lender’s policy decreases as the borrower pays down the loan[3], and it ultimately expires once the loan is paid off completely. The policy does not provide any protection for the buyer; instead, it exclusively safeguards the lender’s interests.

Premiums and Policy Issuance

The cost of a lender’s policy is typically a one-time premium paid at the time of closing. The premium is based on the loan amount (usually between 0.5% and 1%)[4] and varies depending on the insurance provider and the property’s location.

Once the premium is paid, the lender’s policy remains in effect for the duration of the mortgage loan or until it’s refinanced. There are no additional or recurring costs for the lender’s policy after this initial premium payment.

Limitations and Exclusions

Like any insurance policy, a lender’s policy has certain exclusions. These exclusions may vary depending on the insurance provider and the specific policy terms. Standard exclusions include environmental hazards, zoning violations, and certain title defects (a.k.a., “cloud on title“) known to the lender before issuing the policy. Of note is a standard 3(a) exclusion, which doesn’t protect the policyholder from things they have agreed to[5].

For example, it does not cover any property value changes due to market fluctuations or issues arising after the title policy is issued unless they directly relate to the title’s validity. Furthermore, a lender’s policy typically does not protect against problems known to the insured (the lender) that were not disclosed to the insurer at the time of policy issuance.

While the lender’s policy covers the lender’s interests, an owner’s policy protects the buyer’s interests in the property, specifically their equity[6].

An Owner’s Policy, also known as an owner’s title insurance policy, protect the owner’s interests in the property. Unlike the lender’s policy, which focuses on the lender’s investment, the owner’s policy covers the buyer against any title defects or claims that may arise.

Although both policies are similar, the owner’s policy offers broader protection, ensuring the buyer’s financial safety, not just the lender’s.

Who Pays for the Lender’s Policy?

The cost for the Lender’s Policy is almost always the responsibility of the buyer/borrower, as it’s a requirement from the lender to protect their loan investment.

Here’s a simple breakdown:

1. Lender’s Requirement: If a buyer is getting a mortgage, the lender will typically require a Lender’s Policy of title insurance to protect their interest in the property. This policy only covers up to the loan amount and decreases as the loan is paid down.
2. Buyer/Borrower’s Responsibility: Since the Lender’s Policy protects the lender (and not the buyer), the buyer/borrower is typically expected to pay for this policy as part of their closing costs.
3. Difference from Owner’s Policy: It’s essential to differentiate between the Lender’s and Owner’s policies. The Owner’s Policy protects the buyer’s equity in the property, whereas the Lender’s Policy covers the lender’s loan amount. These are separate policies, and their costs are generally separate as well. The buyer might also choose or be required to purchase an Owner’s Policy, but, as mentioned in the previous answer, who pays for the Owner’s Policy can vary based on local customs or negotiations.

It’s always a good idea for buyers to review their Loan Estimate and Closing Disclosure documents (in the U.S.) to understand all the fees associated with their mortgage and to ask questions about any charges they don’t understand.

A lender’s policy is important in real estate investing for several reasons:

• Protection against title defects: A lender’s policy offers protection to the real estate lender against unforeseen title defects that may affect the property’s ownership rights. These defects include outstanding liens, undisclosed heirs, errors in public records, or fraud[7]. A lender’s policy protects the lender from potential financial losses from such title issues.
• Requirement for mortgage approval: Lenders typically require borrowers to obtain a lender’s policy before approving a mortgage loan. This minimizes risks associated with the lending process. Without a lender’s policy, the lender may hesitate to provide the loan as they would have no protection against title defects that can jeopardize their investment.
• Peace of mind for investors: Real estate investors rely heavily on financing to fund their investments. By having a lender’s policy, investors can have peace of mind knowing that their lender is protected against potential title defects. This protection allows investors to focus on their investment strategies and mitigate the risks associated with real estate transactions. Investors can do their own title search with or without title insurance, but a lender’s policy is an additional layer of protection over the transaction.

What happens to the lender’s policy if the loan is refinanced?

When a loan is refinanced, the original mortgage is paid off, and a new one is established. Since the initial loan is settled, the initial lender’s policy concludes.

Refinancing borrowers will typically need to purchase a new lender’s policy[8] to protect the new lender’s interests involved with the refinanced loan. Even if you refinance with the same lending institution, a new lender’s policy is usually required, as the old loan’s policy does not extend to cover the new loan.

Can a lender’s policy be transferred to a different lender?

Lender’s policies are not transferrable between different lenders[9]. This non-transferability clause is standard because the policy is specifically underwritten with the risks and interests of the initial lender in mind. If the loan is sold or transferred to a different lender, the new lender will not be protected by the original lender’s policy.

Each lender in a real estate transaction must have their lender’s policy to ensure adequate protection against the property’s title-related risks.

How does a lender’s policy benefit the borrower indirectly?

While a lender’s policy does not offer direct protection to borrowers, it does provide significant indirect benefits.

Firstly, by protecting the lender’s interests, it plays a pivotal role in facilitating the mortgage approval process, ultimately allowing borrowers to finance the purchase of a property. Lenders may be reluctant to issue mortgage loans without this safeguard due to the heightened risks associated with title defects.

Furthermore, a smooth title transfer process, supported by a lender’s policy, can hasten the closing process, helping borrowers finalize their property purchases efficiently and with fewer hurdles.

Finally, by ensuring that the lender won’t face financial losses due to title issues, it indirectly maintains a stable lending environment, which is essential for potential buyers looking to secure loans for property acquisition.

1. What is lender’s title insurance? (2020, September 4.) Consumer Financial Protection Bureau. Retrieved from https://www.consumerfinance.gov/ask-cfpb/what-is-lenders-title-insurance-en-163/
2. Araj, V. (2023, May 16.) Title Insurance: What You Need To Know. Rocket Mortgage. Retrieved from https://www.rocketmortgage.com/learn/title-insurance
3. Title Insurance Frequently Asked Questions. (n.d.) Louisiana Department of Insurance. Retrieved from https://ldi.la.gov/consumers/insurance-type/other-types/title-insurance-faqs
4. Goff, K. (2023, March 17.) How much is title insurance, and why do you need it? Bankrate. Retrieved from https://www.bankrate.com/real-estate/title-insurance-cost/
5. Stein, J. (2023, January 10.) The Limits Of Title Insurance. Forbes. Retrieved from https://www.forbes.com/sites/joshuastein/2023/01/10/the-limits-of-title-insurance/?sh=35aba782c18d
6. Hayes, A. (2021, September 10.) What Is Title Insurance? Why You Need It and How to Buy It. Investopedia. Retrieved from https://www.investopedia.com/terms/t/title_insurance.asp
7. The Importance of Lender’s Title Insurance in Real Estate Transactions. (n.d.) Title Group of Tennesee. Retrieved from https://titlegroupoftn.com/the-importance-of-lenders-title-insurance-in-real-estate-transactions/
8. Do I need to repurchase title insurance when I refinance? (n.d.) Better Home & Finance. Retrieved from https://better.com/faq/title-and-settlement-services/do-i-need-to-repurchase-title-insurance-when-i-refinance
9. Title Insurance FAQ. (2022, April 20.) Linear Title & Escrow. Retrieved from https://lineartitleandescrow.com/2022/04/20/title-insurance-faq/