Owner's policy or loan policy: which one protects you, and which protects the bank

The loan policy protects the lender, and only the lender

Yes, if you want your own ownership protected, you need an owner's policy; the loan policy your lender requires protects the lender's interest and lasts only until the loan is paid off. According to the Texas Department of Insurance, an owner's policy protects the buyer against covered ownership problems that existed before the purchase but were unknown at closing, and it remains good as long as you or your heirs own the property. You pay for it once, at closing, and it never needs renewing.

We at Capital Title issue both policies at almost every financed purchase we close, and this is one of the most common questions buyers ask at the table. It deserves an answer well before then, because who pays for the owner's policy is decided in the contract.

Two policies, two different people

The easiest way to see the difference is side by side. Both policies are issued from the same title search, and both are standardized forms in Texas, so the language does not change from one title company to the next.

TDI's owner's policy page also notes there are two versions of the owner's form. The T-1R is used for most residential property, and the T-1 is commonly used for commercial property and undeveloped land. If you are buying a lot to build on, or a small commercial building, expect the T-1 and ask your escrow officer how its coverage differs from what you had on your house.

• Loan policy: names the lender, covers up to the loan balance, ends when the loan is paid off, required by virtually every mortgage lender
• Owner's policy: names you, covers up to the purchase price, lasts while you or your heirs own the property, optional but standard in most Texas contracts
• Loan policy: if a covered defect surfaces, the insurer protects the lender's lien
• Owner's policy: if a covered defect surfaces, the insurer defends your title in court or pays covered losses up to the policy amount

What an owner's policy is there for

The title search is designed to find problems before you buy, and most of the time it does. An owner's policy exists for the problems no search could have caught, or that were hidden in records that looked fine. TDI's consumer pages give examples of the risks involved.

If one of these problems surfaces after you own the home, TDI's FAQ explains that the title company defends you in court or pays covered losses up to the policy limit. Without an owner's policy, you would hire your own lawyer and absorb the loss yourself. TDI also stresses notifying the title company immediately when a lien or claim appears, because delay can jeopardize a claim.

• Forged or fraudulent documents earlier in the chain of title
• Errors or omissions in earlier deeds
• A spouse or an unknown heir who later claims an ownership interest
• Unpaid property taxes from before your purchase
• Liens that existed before you bought and were not discovered

What neither policy will cover

Title insurance is not homeowners insurance. TDI is clear that it does not cover fire, flood or theft, and it does not guarantee that you can sell or borrow against the property. It also has exclusions that matter in practice: defects created after the policy date or by you, zoning violations, condemnation in most cases, and restrictive covenants that were disclosed to you.

Most important, the policy covers only what it does not except. Schedule B of your commitment lists the exceptions, such as recorded easements and subdivision restrictions. Those will stay with the property and the policy will not pay for problems arising from them. Read Schedule B before closing, not after.

TDI's FAQ also lists homestead and community property rights among the matters a policy may not cover, along with the rights of people occupying the property. In practical terms, that is one reason title companies ask about marriages, divorces and who lives in the house before closing. Answering those questions fully protects you more than any policy language can.

When skipping it looks tempting

Buyers usually think about declining the owner's policy for one of three reasons: the seller is not paying for it, the house is new, or the purchase is cash. Each deserves a second look.

If the contract makes the buyer pay, the cost is real, but it is a one-time premium against a risk that lasts as long as you own the house. TDI's FAQ also points out that when the loan policy is issued together with an owner's policy it receives a steep simultaneous-issue discount; without an owner's policy, the loan policy is charged the full rate. So the savings from skipping the owner's policy are smaller than the owner's premium alone suggests. My guide on who pays title insurance and closing costs explains how those charges are divided.

A refinance is a different situation. There is no sale, so there is no new owner's policy; your lender requires a new loan policy for the new loan. The owner's policy you bought when you purchased the home continues to protect you, which is one more reason to keep it with your important papers.

Cash purchases and newly built homes

A cash buyer has no lender and therefore no loan policy at all. Without an owner's policy, nobody is insuring the title. That is when I would least want to go without one, because the entire purchase price is at stake and there is no lender whose interest happens to overlap with yours.

A new home is not a new title. The land under it has a history, and the builder's own construction financing, contractors and suppliers create fresh opportunities for liens. Newness of the house tells you nothing about the record behind the lot.

TDI also warns about seller impersonation fraud, in which someone forges documents to sell a house they do not own, and lists buying title insurance as one of the protections. Fraud of that kind is exactly the sort of hidden defect an owner's policy is built for.

Commercial buyers face the same question at higher stakes. A business buying a building or land usually has more invested than any lender, and the T-1 owner's policy is the tool for protecting that investment. In those files I would also expect a closer look at the survey, access and endorsements, which is where an experienced commercial team earns its keep.

Small choices in the contract that change your coverage

The TREC resale contract lets the parties decide whether the standard exception for boundary discrepancies, shortages in area and encroachments stays in the policy or is amended to read only shortages in area, and who pays for that amendment. The amendment narrows what is excepted, which generally means more coverage for survey-related problems. It depends on an acceptable survey, so ask your escrow officer how it applies to your file.

Lenders often require endorsements to their loan policy. Owners can ask about additional coverage too. Ask what is available for your property and what each option changes before you decide.

These choices are made when the contract is written, often by agents filling in a form quickly. If you are a buyer, ask your agent which boxes were checked in paragraph 6A and why. A two-minute conversation at the contract stage is the cheapest way to understand what your future policy will look like.

Keeping an owner's policy working for years

TDI notes that you will not receive the paper policy until roughly 30 days after closing, although coverage begins at closing. When it arrives, keep it with your deed and other important house papers. TDI does not keep copies of Texas title policies, so if you lose it, you will need the issuing title company or the underwriter.

Two later events can affect your coverage. If you add significant improvements or the home's value rises, TDI notes that an increased value endorsement is available; without it, coverage stays at the policy amount. And if you transfer the house to a trust, an LLC or your children, coverage may change depending on the policy type, so check with your title agent or an attorney first. My guide on what to do after closing covers these and other long-term steps.

Making the decision for your closing

If you are under contract on a Dallas home, look at paragraph 6A of your contract to see who is paying for the owner's policy. If it is you and you are unsure, call your escrow officer and ask for the premium and the simultaneous loan policy figures for your price and loan amount. We can also walk you through the commitment's exceptions so you know what the policy will and will not cover.

If the seller is paying for it under your contract, there is nothing to decide; you will receive an owner's policy at closing, and your job is to read the commitment and keep the policy when it arrives. If you are paying, compare the premium with what you have at stake in the house rather than with the other closing costs, because that is the risk it covers.

The owner's policy is one part of the larger month of title work between contract and closing. My guide on what the title company is doing for the next 30 days covers the rest, from the search to the problems that most often delay a closing in Dallas County.

Questions people ask me