Key Takeaways
- Owner's policies protect buyer equity; lender's policies protect the mortgage lender—both are essential for investors.
- Extended ALTA coverage adds protection for off-record risks like unrecorded easements and boundary disputes for 10-20% more premium.
- The title commitment has four schedules: property identification, requirements, exceptions, and special conditions.
- Review the title commitment within the objection period and raise exceptions that are unacceptable before they become permanent policy exclusions.
Title insurance is unique among insurance products: it protects against past events (undiscovered defects in the chain of title) rather than future events. Understanding the differences between owner's and lender's policies, standard and extended coverage, and the title commitment review workflow is essential for protecting your investment at closing.
Key Stakeholders
Owner's Policy vs. Lender's Policy
Two distinct title insurance policies exist. The Lender's Policy (also called a loan policy) protects the mortgage lender's interest in the property up to the loan amount. It is required by virtually all lenders and the buyer pays for it. Coverage decreases as the loan is paid down and expires when the loan is fully repaid. The Owner's Policy protects the buyer's equity interest in the property up to the purchase price. It is optional (though strongly recommended) and in many states the seller pays for it. Coverage lasts as long as the owner (or their heirs) has an interest in the property. For investors, both policies are essential—the lender's policy satisfies the financing requirement, while the owner's policy protects your equity from title claims that could emerge years after closing.
Standard vs. Extended Coverage
Standard coverage protects against defects discoverable through the public records search: forged deeds, undisclosed liens, recording errors, and incompetent grantors. Extended coverage (ALTA policies) adds protection for off-record risks: unrecorded easements, boundary disputes not shown in public records, rights of parties in possession (tenants or squatters), and survey-related issues such as encroachments. Extended coverage requires an ALTA/NSPS survey. The incremental cost of extended coverage is typically 10-20% above the standard premium, but for investment properties the additional protection is worth the cost. Common exclusions from both policy types include: known defects listed as exceptions, environmental liens, zoning violations, and eminent domain.
Title Commitment Review Workflow
The title commitment is the title company's offer to insure the property, subject to listed requirements and exceptions. It has four schedules. Schedule A identifies the property, the proposed insured, the type of policy, and the coverage amount. Schedule B-I lists requirements that must be satisfied before the policy will be issued (paying off existing liens, obtaining releases, recording documents). Schedule B-II lists exceptions—items the title company will not insure against (existing easements, CC&Rs, survey matters). The buyer's attorney reviews the commitment to: verify the legal description matches the survey, identify and object to unacceptable exceptions, confirm all B-I requirements can be satisfied, and ensure the policy type and amount are correct. Objections must be raised within the contractual objection period (typically 5-10 days after receipt).
| Closing Cost Item | Buyer Pays | Seller Pays | Typical Amount | Negotiable? |
|---|---|---|---|---|
| Origination Fee | Yes | No | 0.5-1.0% of loan | Yes — shop lenders |
| Appraisal Fee | Yes | No | $400-$700 | Rarely |
| Title Insurance (Owner's) | Yes (or split) | Sometimes | $1,000-$3,000 | Yes — often negotiated |
| Title Insurance (Lender's) | Yes | No | $500-$1,500 | No — lender required |
| Escrow/Settlement Fee | Split | Split | $500-$1,500 | Yes — varies by market |
| Recording Fees | Yes | No | $100-$500 | No — government fee |
| Transfer Tax | Varies by state | Varies by state | 0.1-2.0% of sale price | No — statutory |
| Attorney Fee | Yes | Yes (each) | $500-$2,000 | Yes — negotiate flat fee |
| Prepaid Taxes & Insurance | Yes | No (prorated credit) | 2-6 months of escrows | No — lender required |
| Survey | Yes | Sometimes | $350-$800 | Yes — often seller provides existing |
| **Total Buyer Closing Costs** | — | — | **2-5% of purchase price** | — |
Key Takeaways
- ✓Owner's policies protect buyer equity; lender's policies protect the mortgage lender—both are essential for investors.
- ✓Extended ALTA coverage adds protection for off-record risks like unrecorded easements and boundary disputes for 10-20% more premium.
- ✓The title commitment has four schedules: property identification, requirements, exceptions, and special conditions.
- ✓Review the title commitment within the objection period and raise exceptions that are unacceptable before they become permanent policy exclusions.
Sources
Common Mistakes to Avoid
Purchasing only a lender's policy and skipping the owner's policy to save money
Consequence: The lender's policy only protects the loan amount, leaving the buyer's equity completely unprotected against title claims
Correction: Always purchase an owner's title policy—the incremental cost is small relative to the equity protection it provides
Accepting standard coverage when extended coverage is available
Consequence: Standard coverage excludes survey matters, mechanics' liens, and unrecorded interests that can materially affect property rights
Correction: Request extended (ALTA) coverage with appropriate endorsements for commercial acquisitions—the additional cost is modest
Test Your Knowledge
1.What is the difference between an owner's title policy and a lender's title policy?
2.What is the difference between standard and extended title coverage?
3.What is a title commitment?