Nationwide Mortgage Licensing System (NMLS) Practice Exam

A mortgagor's title insurance policy is primarily based on what?

1. Transferable

2. Required

3. Based on purchase price

4. Never used

The correct answer is: Based on purchase price

The correct answer is that a mortgagor's title insurance policy is primarily based on the purchase price. This reflects the principle that the coverage amount for title insurance is typically set to the value of the property being purchased. Title insurance protects the lender against any future claims or issues that could arise with the title of the property, and since the purchase price represents the investment the borrower is making, the policy is often aligned with this amount to ensure adequate protection. Title insurance is essential in real estate transactions to mitigate risks associated with defects in the title that may not be discovered during a standard title search. By securing a policy based on the purchase price, it ensures that the coverage is commensurate with the value at stake should any title defects become apparent. The title insurer investigates the property's history to determine its ownership and any liens or encumbrances. While there are considerations around whether title insurance is required (which applies to some lenders and situations), the core principle of determining coverage by the purchase price underscores the financial positioning of both the borrower and the lender in the transaction.