Why Title Insurance?
It's understandable when a home buyer expresses outrage at the requirement and cost for title insurance because he probably has no idea of what it does for him or even why he's required to pay for it. How would he, unless his real estate agent, lender or closing agent explains it well - which rarely happens, due to time constraints and the mountain of required paperwork at every step of any real estate transaction.
Some real estate agents (and probably some lenders or closing agents) don't explain it to their clients because they just don't understand it themselves. I was reminded of that this morning when I read the featured post, Title Insurance is a Scam in Massachusetts.
Ignorance is NOT bliss, especially when it comes to elements of our profession that we should be able to accurately explain (if not endorse) to our clients. Title insurance is one of these.
Experience teaches me that title insurance is no scam and, in fact, it's a good investment. Where else can you buy insurance that's in effect for up to 30 years, with only one up-front premium? And the fact is that title insurance is required by mortgage lenders as a condition of obtaining a home loan.
Why home buyers purchase lender's title insurance:
Lenders have a vested interest in any collateral used to secure a loan, and they have every right to require insurance for the title of a home - i.e., protection against title fraud, error, or mishandling, among other things. As a condition for lending their money, they require borrowers to purchase title insurance for the same reason they require an appraisal, a credit report, and property insurance naming the lender as an insured party: to protect their investment. Failing to do so would be negligence on the lender's part.
Maryland borrowers have the option to purchase the same title protection as lenders at additional cost, and the amount paid at closing is a one-time premium with no additional payments during the life of the loan.
Buyers purchase lender's title insurance for Peace of Mind - the same reason they purchase any insurance.
Why purchase owner's title insurance?
Lender's title insurance protects the lender in the event of a title issue. It does not protect the borrower, however, who may feel the effects of a title issue long before it impacts the lender. Let me share a few examples of situations when my own clients benefited from owner's title insurance:
Property description - Early in my career, a discrepancy was discovered in the property description for a townhouse community in my market. Lenders were protected during the years of litigation, but homeowners in this community who had buyer's title insurance were protected. Only they could sell their homes before the matter was resolved. Since then, I have recommended optional buyer's title insurance to all of my clients.
Encroachment - Then there was the case of two condo owners who came to agreement about swapping their garages. Everyone was happy with the arrangement until one was ready to sell, and an alert appraiser noticed that the condo owner did not have possession of the garage deeded with that unit. Returning possession of the garages to the two deeded owners became a condition of my buyer's new lender, and closing would not have taken place at the scheduled date and time if there had not been owner's title insurance in effect.
Unreleased liens - In two other cases involving my clients, one a buyer and the other a seller, previous construction liens reared their ugly heads. These liens dated back to construction of the home and apparently had been overlooked in previous title searches. Many hours were required to track down the the lien holder (no longer in business) and for previous title companies to pull their old files out of storage to review whether the liens had been paid. If there been no owner's title insurance, these two cases would not have closed on time while the legal beagles did what they do to address these situations.
As we've seen throughout the foreclosure crisis, lenders have plenty of time to wait... and wait and wait and wait... while home sellers are denied short sale approvals time and again and foreclosures are postponed for months and years. Would any of us want to wait for a title issue to impact their lender significantly enough to motivate a title insurance claim and then hope their claim coincidentally saves our butts? I'm very confident that lender's title insurance would not have expedited any of the transactions described above - but owner's title insurance did.
Who determines the cost of title insurance?
In Maryland, insurance rates are established by the state and the cost of title insurance is not negotiable, so it doesn't matter which closing agent a borrower selects. A percentage of the one-time premium is paid to the title agent as compensation for preparing the required policy.
The cost of title insurance may vary from one state to the next, but insuring the title of one's home simply makes sense no matter where your property is located. You may never need title insurance, but won't you be glad to have it if you do find yourself with a title issue?
Guaranteed,... that premium is less than the cost of hiring an attorney or settling with another party in a lawsuit or even a minor title discrepancy. I wouldn't buy a home without it!