Title Insurance for VA Loans: What Borrowers Need to Know

Marcus Marion, CMA™ 2 months ago 0 14

When using a VA loan to buy a house, you will likely encounter the term “title insurance” at some stage. Title insurance is an important component of the mortgage process, for VA and conventional home loans alike.

But what is title insurance exactly? Is it required for all VA loans? And what kind of protection does it provide to you, as a home buyer?

Let’s start with the short version before digging into the details:
When it comes to VA loans, there are two main types of title insurance: the lender’s policy and the owner’s policy. Owner’s title insurance (the main focus of this article) provides coverage for potential title defects, such as undisclosed liens, errors in public records, or ownership disputes.

What Is Title Insurance, Exactly?

Title insurance provides financial protection and compensation for the policyholder in case of title-related issues, such as undisclosed liens, ownership disputes, or errors in public records.

It doesn’t prevent someone from trying to claim ownership of your house. But it can help mitigate the financial impact of such claims by covering legal costs and potential losses that come from defending your ownership rights.

Title insurance can be used for conventional and VA loans alike. But the Department of Veterans Affairs technically doesn’t require these policies for VA loans. We’ll revisit this point in a moment. First, we need to make an important distinction.

There are two main types of title insurance, based on who they protect:

Lender’s Title Insurance: The lender’s policy protects the lender’s financial interest in the property. The home buyer usually pays for the lender’s title insurance policy, in the form of a one-time payment rolled into the closing costs. The lender’s policy typically remains in effect until the loan is paid off.

Owner’s Title Insurance: The owner’s policy protects the homeowner’s interest in the property. It provides coverage against any title defects or issues that may arise after the purchase, such as undisclosed liens, errors in public records, or ownership disputes. The owner’s policy is usually paid for by the home buyer as a one-time premium during the closing process.

What Do These Insurance Policies Cover?

When it comes to a VA loan home purchase, an owner’s title insurance policy can provide important financial protection against certain legal actions.

According to the Consumer Financial Protection Bureau (CFPB):

“When you purchase your home, you receive a document usually called a deed, which shows the seller transferred their legal ownership, or ‘title’ to their home, to you. Title insurance can protect you if someone later sues and says they have a claim against the home from before you purchased it. Legal claims could come from a previous owner’s failure to pay taxes, or from contractors who say they were not paid for work done on the home before you purchased it.”

As with other forms of insurance, the coverage provided by an owner’s title insurance policy can vary depending on the type of policy being purchased. In the context of VA loans, title insurance typically protects the homeowner from the following.

  • Ownership Issues: Title insurance can cover ownership disputes and claims against the property’s title. This includes situations where someone else asserts ownership rights to the property, such as undisclosed heirs or previous owners with legal claims.
  • Liens and Encumbrances: It protects against undisclosed liens or encumbrances on the property’s title. These may include outstanding mortgages, unpaid taxes, judgments, or other financial obligations that could affect the property’s ownership.
  • Forgery and Fraud: Title insurance provides coverage in case of forgery or fraud related to the transfer of the property’s title. This includes instances where forged documents are used to convey ownership, as well as fraudulent representations regarding the property’s history.
  • Errors in Public Records: It safeguards against errors or discrepancies in public records that could affect the property’s title, including clerical errors, inaccurate surveys, or improperly recorded legal documents.
  • Title Search and Defense Costs: In the event of a title dispute or legal challenge, title insurance covers the costs associated with defending the property’s title in court. This includes legal fees, court costs, and other expenses incurred during the resolution process.

Again, all of this can vary depending on the type of coverage you purchase. So be sure to read the fine print and ask plenty of questions until you understand the exact nature of your policy.

Do VA Loans Require a Title Insurance Policy?

So, do VA loans require a title insurance policy for homeowners?

The short answer is no, these policies are not an official requirement for VA-backed mortgage loans. But your lender will probably require at least a lender’s title insurance policy, and you should consider purchasing your own coverage as well.

On its website, the U.S. Department of Veterans Affairs explains that they do not “require a lender making a VA loan or the veteran-borrower to obtain title insurance. The lender may apply its own title insurance requirements to VA loan transactions.”

Benefits It Provides to VA Loan Borrowers

At this point you might be wondering:

“If title insurance is not required for a VA loan, why should I pay for it? It’s going to increase the amount of money I have to pay at closing. But what do I get out of it?”

Ultimately, it’s your call. While your mortgage lender might require a lender’s title insurance policy when you take out a VA loan, the owner’s policy is usually optional. Even so, it offers a number of important benefits.

Here are two reasons to consider an owner’s title insurance policy when using a VA loan:

  • Peace of Mind: Title issues and disputes can be costly and stressful. An owner’s title insurance policy gives you peace of mind, knowing you’re protected against unexpected ownership challenges that could threaten your investment.
  • Avoiding Financial Hardship: Unforeseen title problems can result in significant legal fees and even the potential loss of your home. Title insurance covers these costs and compensates you if the worst-case scenario occurs.

Even though owner’s title insurance is optional for VA loans, it can still provide an important layer of protection for homeowners.

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