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It’s a good policy to buy title insurance
At the next dinner party you attend, ask your neighbor at the table about the title insurance policy she bought when she purchased her home. Chances are either her eyes will glaze over or she'll insist it's a big scam. Congress is weighing the scam reports. On April 26, the U.S. House Committee on Financial Services' subcommittee on housing and community opportunity heard from title agents, representatives of the insurance industry and others regarding reported kickback schemes among mortgage companies and real estate agents who receive referral fees from title agencies in exchange for business.
Even as Congress considers these claims, Washington-area real estate consumers, real estate agents and settlement agents say that title insurance does, in fact, give buyers peace of mind. They point out that there are a couple of ways to save money on title insurance.
First, some background. Title companies typically search as many as 60 years' worth of public records to ensure that the seller of a piece of property is its rightful owner and that there are no liens or other unsettled claims against the property.
Title insurance protects a buyer from errors, omissions and defects in the title search -- such as the discovery of a forged document that was used in an earlier sale of the property.
First-time buyers -- and even those more seasoned in real estate transactions -- often lack a full understanding of what title insurance is and why they pay hundreds or thousands of dollars for it come settlement time.
"My first condo purchase, I didn't know anything," says Linda Voss, a technical writer who bought in Arlington in 1996. "I assumed the loan. I had no Realtors; I just used an attorney. I have no idea if I even had title insurance on that property. If I did, it was part of the settlement costs, and I don't remember it specifically."
Steven Waxman, a printing consultant who bought a home in Riverdale almost 20 years ago, says he too knew little about title insurance then.
He says his rudimentary understanding of its role was that without it, "your house can be taken away."
"I felt it was prudent and worth every penny," he says, recalling that the policy cost a few hundred dollars at the time. "I would no sooner buy a house without title insurance than I would drive a car without a spare tire."
And mortgage companies aren't about to let you. While lenders require buyers to purchase title insurance to cover the amount of the buyer's loan, "the most reputable companies will separate out the [amount of the purchase] above the loan amount," says Ryall Smith, a Realtor with Coldwell Banker.
Coverage for this part of the purchase is known as the buyer's policy; it is, in fact, optional.
Some Realtors observe that buyers purchasing real estate in the greater Washington area must consider the region's historic homes, which arguably increase the chances that descendants of families who lived in these properties for many decades may come forward and say they own the house you just bought.
"If someone claimed to have an ownership interest, whether they did or not, presumably the title insurers would jump into action and let you" -- the homeowner with a title insurance policy in your possession -- "sleep easier at night," says Mr. Smith, who has sold real estate for 18 years and is licensed in the District, Maryland and Virginia.
Mr. Smith says that it is often not until the buyer, seller and their agents are at the settlement table that specific information about the two parts of title insurance -- the lender's required portion and the buyer's optional portion -- is even discussed.
"Buyers might be asked, 'Do you want this [buyer's] policy?'" Mr. Smith says. "And a few times, I've had buyers say, 'I don't want it,' and the settlement company removes it."
Carolyn Davis, a settlement agent with Monarch Title at Eastern Market on Capitol Hill, recalls an occasion when a buyer declined to purchase an owner's title insurance policy.
"This fellow is subject to transfer [in his job] on a regular basis," she says. "He bought his home with a first and second trust with 100 percent financing. He'd be subject to equity in another 18 months" -- the same time he'd be transferred out of the area.
"He said, 'I don't see why I should purchase an owner's title insurance policy,' and I could not help but agree with him," Ms. Davis says. This buyer would not be remaining in his home long enough to build equity in it.
In situations where a title insurance policy is fewer than 10 years old, there may be substantial cost savings to the buyer to get a copy of the seller's title insurance policy, Mr. Smith says. When the seller can produce his old policy -- which is then sold to the buyer at a lower "re-issue" rate -- it can result in potentially hundreds of dollars in savings, he says.
In a cooling market where homes stay on for weeks or months, Mr. Smith says that a clean title insurance policy can function as a tool for sellers.
"We'll include a copy of the policy in the disclosure documents" made available to prospective buyers during an open house, he says. The savvy buyer knows he can whack something off of his closing costs by negotiating to purchase the policy at the re-issue rate.
If you're one of those rare and fortunate souls paying for your home with cash, bully for you; no one will require you take out title insurance, but buying it is still a prudent move to protect yourself down the road in case someone should come forward and claim ownership of part or all of your home.
"I often say to my buyers, we just don't know who might come out of the woodwork," says Mr. Smith.
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