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Why do New Jersey homebuyers need 2 title policies?

On Behalf of | Jul 4, 2024 | Real Estate Law |

There are numerous expenses people have to cover as real estate transactions unfold. Obviously, those buying a new home have to pay the purchase price that they offered the seller in full. For the vast majority of people buying property in New Jersey, a mortgage is necessary to afford the full price of a property.

Many of those expenses are requirements established by their mortgage lender. For example, mortgage companies typically require an inspection of the property to confirm that it is in decent condition. The buyer has to pay for that and other services that help protect the mortgage company’s funds used to acquire the property. A lender is also the reason why the buyer has to pay for not one but two separate title insurance policies.

What title policies provide

A title insurance policy is a form of protection for unlikely but catastrophic circumstances. Like other forms of insurance, title policies exist to protect people from circumstances beyond their control. The vast majority of title insurance policyholders never make a claim. They only need coverage if someone else claims to have an interest in the property after they buy it.

The reason that there are two policies required during a residential transaction is that both the buyer and the lender require protection. The buyer has at minimum thousands of dollars at risk because of the downpayment they made. The lender initially has much more to lose. Mortgage company funds cover the entire purchase price.

If a title claim occurs, an outside party may insist they have an interest in the property or should be the owner of the property. That title claim could lead to major losses if the courts rule in favor of the outside party. Title insurance pays for legal representation during claims and can reimburse the lender and buyer for lost equity.

By requiring that buyers purchase a lender’s policy, mortgage companies effectively eliminate the risk of losing the capital used to fund a transaction. Buyers also have policies that protect their investments. The buyer’s policy can also provide them with legal representation if the title dispute goes to civil court. Although title insurance can be costly, protecting the major financial investments required when acquiring real estate is usually a smart financial decision.

Buyers who understand the reasoning behind different closing costs may feel less frustrated about those additional expenses during residential real estate transactions. Title insurance is a form of protection people rarely need, but those who do require its support are glad to have their policies.

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