Friday, July 20, 2018

Frequently Asked Questions

Title Insurance

Title Insurance

What is title insurance and how can it help me?

As a settlement officer, I present and explain the Settlement Statement (or HUD-1) to every party of the transaction at settlement.  There is always at least one person a month who believes that title insurance is an unnecessary charge.  Allow me to explain how necessary it is.

During my licensing classes, one of my instructors explained what an owner’s policy of title insurance covers in a simple acronym:  ONAM.  ONAM stands for Own, Notice, Access and Marketability.  Which means, what an owner’s policy of title insurance does, is:  insures that you own the property, gives notice of any encumbrances, liens etc. that will affect the way you use your property, insures that you have public access to your property (VIA a public road or public right of way) and it insures marketability of title.  So, basically, the owner’s policy gives you exactly what you expect – proper usage and title to your property.

If it’s something so basic, then why bother paying for it? 

This question brings up a very valid point – why pay for something that you shouldn’t have to?  The reasons being are very simple – people make mistakes and people commit fraud.  Title insurance is different than most other insurance as it insures backward rather than forward.  When you decide to purchase property, what happens is the title company hires an abstractor do a title search, and then the title company examines said search.  Title companies are responsible for catching mistakes in back title and rectifying them, however, some mistakes are untraceable, such as forgery or fraud and some mistakes get overlooked.  The question then being...

What happens if there is a mistake/title defect?

 If you purchased title insurance, then, the answer is simple.  You file a claim with the underwriter.  A claim is applicable if you are affected negatively by any of the items covered by the aforementioned ONAM.  If, for example, one day Joe Schmoe comes knocking on your door telling you to get out of his house and explains that there was a defect with a transfer in the chain of title, and he has validity to his claim, you call the underwriter of the title company from whom you purchased the house and explain that someone is claiming title to your property.  The underwriter is then obligated to reimburse you for your loss and all attorney’s fees incurred.  If you did not purchase title insurance, then you are up the creek without a paddle.  Pack your bags, you’ve got no place to live, unless you want to go to court and attempt to prove him wrong at your own expense. 

So, how often does this happen?

As a whole, the title insurance industry has an extremely low percentage of claims.  The better question to ask here is then: Can you afford to not have title insurance?  If you have enough money to pay for attorney’s fees to go to court to argue the claim and have enough money to pay off any mortgages on the property with the title defect (if Mr. Schmoe is proven correct) and purchase a new home so you have a place to live, then you do not need to purchase title insurance.    However, if you are not one of these people, I would highly recommend purchasing an owner’s policy.  Your house is one of the biggest investments of your life.  Can you afford to lose it?  Remember, the lender’s coverage only covers the lender in case of loss, it does not cover the owner of the property.

Another common question I get is Do I need title insurance if I purchased my property from the builder?  The answer is absolutely.  The land was owned before the builder purchased it and is subject to the same problems as purchasing from an individual.

How much does title insurance cost?

Title insurance varies depending upon the purchase price is and which type of policy you choose to purchase.  The homeowner’s/advantage policy is the better of the two owner’s policies because it covers more.  The standard owner’s policy costs less, however it also covers less.  For most underwriters the premium (for a Maryland property) for a standard owner’s policy with a purchase price of $100K is $439.00; for an enhanced policy, the premium is $516.80.  The rates per thousand decrease as the purchase price increases and is a relatively small price to pay for the possibility of a huge loss in the future, should any issues arise. 

The other good thing about an owner’s policy is that you only purchase it once, when you purchase your home.  You are also eligible for a reissue rate discount in the future for lender’s policies when you refinance.  Owner’s policies are optional, therefore the choice is yours.