Wednesday, March 21, 2007

query: refuse to pay title insurance

Well, if you are paying cash for the property, that's an option, but I would advise against it.

Most mortgage lenders will require a loan policy and they expect you to pay for it.

In Pennsylvania, we are required to issue an owner policy in a purchase transaction unless you affirmatively say you do not want it. We are expected to assume that you DO want an owner title policy. Want to know why?

Because a whole heck of a lot of title insurance agents assumed consumers did NOT want an owner policy and those consumers who paid for a loan policy thought they were covered. Big surprise when they went to make a claim.

If you tell us you do NOT want an owner policy, there is a state mandated waiver form you MUST sign which acknowledges that you have ABSOLUTELY NO PROTECTION.

4 comments:

birny said...

Diane,

I'm not discounting the value of an owner's policy in general, but what is the value of an owner's policy with a home purchased with a no-down or very low-down payment loan? Wouldn't the lender's policy cover the entire purchase price in that event of a no-down loan? And the owner's policy would provide no additional coverage? By the way, what do you think should be the charge for an owner's policy? Do you or the title insurer do anything more with the simultaneous issue of an owner's policy with a lender's policy than with the issue of just a lender's policy? Thanks for your blogs!

Birny

Diane Cipa, The Closing Specialists® said...

Hi, Birny, and thanks for a really good question.

Every state has different pricing and not all are regulated. In Pennsylvania, we are regulated. In a simultaneous issue, the premium is based on the higher of the loan amount or the sale price. So, in the case of a VA transaction where the loan amount exceeds the sale price, the buyer is receiving the owner policy at no extra cost.

Interestingly, there are STILL some attorneys and title agents who habitually throw a waiver in front of the buyer at closing and don't issue owner coverage even when there would be no extra cost to the buyer. It's a crime.

Here's an example of basic premium in Pennsylvania:

sale price $115,000
loan amount $109,250

A basic premium of $933.75 would cover both the owner and loan policy.

If the buyer waived the owner policy and only paid to cover the lender, the premium would be $908.75.

The difference in cost is minimal but the difference in coverage is total and absolute.

A homeowner gets no benefit from the loan policy at all and the loan policy only kicks in to cover the lender in foreclosure.

Let's say you buy a property with 100% financing for $150,000 today. You improve the property and try to sell it a few years later. The buyer's title insurer finds a title problem that was undiscovered when you purchased the property.

If you have an owner policy, your title insurer will fix the problem. If you have no coverage, you are on your own.

The difference between an owner and loan policy is hard for most people to understand, especially because most Realtors and mortgage lenders don't undertand the difference.

There's much bad info out there and that's why I love these blogs. It's such a great way to share information. Thank you!

birny said...

Thanks, Diane. As always, I learn tons from you. Folks in PA get a good deal on concurrent issue. In CA, where title insurers file their own rate manuals, you find a $100 charge for concurrent issue of a lender's policy with an owner's policy (i.e., the basic premium is based on the owner's policy) when the coverages on the policy are the same (i.e., both standard or both extended). When the coverage on the lender's policy is greater (extended coverage lender's policy vs. standard coverage owner's policy), the charge is 40% of the basic premium, $300 minimum for LandAmerica title insurers, for example. The proposed title rate regulations would lower the cost of the concurrently-issued policy. What do you think is a reasonable charge for a concurrent issue -- based on your answer to the previous post, the additional cost associated with the second policy is for claim settlement and not with search, exam or underwriting.

Another thought -- since the lender's policy insures the loan amount, the coverage declines over time as the borrower pays off the loan. Consequently, even if the loan amount and purchase price start out the same, the amount covered under the lender's policy shrinks from the amount of the owner's policy over time.


Birny

Diane Cipa, The Closing Specialists® said...

The coverage on the loan policy does not decline as the loan amount is paid down. The title insurer is obligated to handle covered risks up to the amount of the policy. They may in the course or settling a claim be paying costs for litigation, etc.