Title Insurance: Understand It and Save Money

When purchasing a home, many buyers expend considerable time and effort in lining up the most cost-effective mortgage financing plan. But they don’t take steps to minimize their closing costs particularly in one of the most expensive areas, being title insurance.

In fact, title insurance is something of a mystery for many consumers. In most cases when buying a home, you can’t avoid this expense. It’s usually required by mortgage lenders. But there are ways to save money when purchasing a title policy.

Title insurance is a unique type of insurance. Unlike most insurance that covers specified future events and charge an annual premium, title insurance is designed as a safeguard against loss arising from hazards and defects already existing in the title. And its cost is a one-time payment at the time the home is purchased, or when it’s being refinanced.

Another interesting point: Normally, title insurance doesn’t protect new homeowners who pay for it. It protects the bank or other mortgage lender. The searcher (with the title company) checks on details such as making sure there isn’t a lien against the title, or that the person selling the home really owns it.

That searcher, incidentally, should be licensed and bonded. If a mistake is made during the searching process, the lender might collect on the value of the mortgage from the title company while the homeowner continues making payments on the mortgage — on a home he may no longer own.

There are two types of title insurance — a lender’s and owner’s policy, said James R. Maher, executive vice president of the American Land Title Association (ALTA). While the lender’s policy doesn’t name the buyer and the buyer is not a third-party beneficiary of that policy, it does provide much indirect protection.

For example, in a total failure of title, an uninsured owner would not have his or her equity protected. But the owner’s lender would be paid off and the owner’s obligation under the (mortgage loan) note would be cancelled as well. Without the lender’s title insurance, the buyer would continue to be obligated to the lender under the note. Partial title failures would have a similar impact.

As for those ominous title insurance fees (premiums) that often shock home sale principals at the closing table, they are stable or declining in many areas, according to Denny Roland, corporate executive vice president for First American Title Insurance Company. As competition in the title insurance field intensifies, rates tend to drop a bit, he noted.

Increasingly, major real estate brokerage firms, builders and mortgage lenders are establishing their own title insurance and escrow operations or joint venturing with established title insurers or escrow companies, thus adding to competitive pressures in the industry, Roland pointed out. And often an all inclusive fee is charged by full-service firms for title insurance and escrow fees, he said.

Since 1983, brokers, builders and non-bank mortgage lenders have been authorized under the Federal Real Estate Settlement Procedures Act to own such interests, it was noted by Maher. With the passage of the Gramm-Leach-Bliley omnibus banking reform legislation last year, banks have been relieved of restrictions generally regarding insurance sales and are now able to so invest.

Our organization (ALTA) fought against what we called `controlled business for many years. We have bowed to the inevitable, and now embrace all title agents who provide full services to their customers regardless of their ownership composition, Maher said.

Consumers can sometimes save money with a limited lenders policy, requiring less title work. This, of course, must be acceptable to the lender.

In cases of refinancing a home, the owner does not have to obtain a new owner’s title insurance policy since the original policy is good for as long as the owner (and owner’s heirs) has an interest in the property.

I would advise consumers to ask their title firm representative about any special plans that might be applicable to their transaction, Roland said. Some short-term rates can save as much as 20 to 40 percent off a normal rate.

Lower re-issue rates are available in most states and, if the seller in a transaction has a prior owner’s title insurance policy, the seller or buyer can save substantially on the purchase of the new owner’s policy, according to Maher (executive VP of ALTA).

Many people question the justification of title insurance fees, considering that the industry pays claims equaling to only about 5.4 percent of operating income. That compares to 70 to 80 percent for property and casualty insurers.

It should be noted that in the title insurance industry we pay upwards of 80 percent of the premium revenues in risk avoidance expenses, Maher said. That’s as it should be. We’re nearly unique among insurance lines in that we look to insure against prior events that may result in a future claim.

You don’t want that claim. You want the most thorough research of title possible to avoid such a claim. And that’s where we invest the public’s premium dollars to achieve the lowest claims rate possible.

Both Maher and Roland recommend that homebuyers and sellers shop around for the best title insurance deal. That’s a good idea in every state and we promote it, Maher said.

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Last year racked up a record in the mortgage industry for the number of loans granted for exceptionally low down payment home purchases. About 41 percent of new mortgages were for purchases with less than 20 percent down payment. Thirty percent of borrowers put up less than 9 percent down payment. And 15 percent of them were 4 per cent or less down.

Also, a record was achieved on the size of the loans. About twice as many, on average, were loans for amounts ranging from $250,000 to $1 million, compared with previous years.

Anyone who follows the mortgage industry at all knows that those numbers will result in rising delinquency and foreclosure rates. That’s what we’re reaping now a significant increase in those rates in most areas of the country.

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In recent months, more families with credit-impaired (marginal) qualifications have been obtaining mortgage loans to finance the purchase of a home. But they receive the loan at a price, according to the 2001 Fannie Mae National Housing Survey.

Developments in the mortgage field, and general economy, have divided borrowers into two distinct camps, the survey report noted. Persons and families with strong credit histories are feeling more confident than ever regarding their chances of obtaining a favorable mortgage. On the other hand, persons with poor credit feel less confident than ever, but often obtain a mortgage even though they must settle for more costly, less desirable terms.

Clearly, the housing finance system is working extremely well for millions of families but as the survey found, not for every American, said Fannie Mae chairman Franklin Raines. The results raise several issues for the entire mortgage industry to address, and the central question is whether all consumers are enjoying their basic right to the lowest-cost mortgage for which they can qualify.

Answering this and other questions is critical if we are to close the homeownership gaps facing many groups in our country.

Generally, the survey found that more homeowners today, buoyed by a drop in mortgage rates from year-ago levels, believe this is a good time to buy a home better than a year ago. About 27 percent believe this is a good time to buy, compared with 19 percent a year ago.

The public’s positive view of the current home buying market is apparently not much influenced by the recent bad news about our economy, layoffs, declining corporate earnings and the stock market slide. In fact, more people are now encouraged by their prospects to have enough money for a down payment when they decide to buy a home.

However, the survey confirmed that credit-impaired borrowers feel vulnerable when applying for a mortgage loan. They realize that granting a loan to them (sub-prime lending) is an important source of business for today’s lenders, but those loans carry some of the highest rates in the market.

While all homeowners are split on the question of whether lenders take advantage of credit-impaired borrowers or help them, nearly half (49 percent) of those borrowers said lenders help people like them, even though they may be paying more than 10.5 percent interest for their mortgage loan.

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Jim Woodard writes a nationally syndicated newspaper column on real estate news and trends, carried in about 230 U.S. newspapers. He also writes freelance features. Also, he’s a professional storyteller, with a Web site at www.storyteller.net/jwoodard/.

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