What Is Title Insurance And Why Do I Need It Anyway?

Most home buyers are focused on whether or not they will be able to meet their financial obligations of home-ownership. They take for granted that the property title is in good order and suitable for legal transfer of ownership. But title issues and unknown liens on your home can be more stressful and problematic than the potential stress associated with paying your household bills. What you do know, you can deal with. But what is title insurance for? The things you don't know about.


Potential title problems

The housing market collapse resulted in a lot of titles being sold in bulk, transferred to companies that went under, and being part of some hurried legal processing. The opportunity for clerical mistakes, unknown liens, mistakes in record examination, or home titles being used in some fraud is rampant.  There is also the possibility of undisclosed heirs and other omissions in the deed. By some accounts of real estate law firms, one out of every three title searches finds some defect in the record that must be corrected prior to closing. Title insurance protects you in the event some problem occurs that was not found in the public record or was overlooked in the process of searching the title.


Your title insurance policy

The Owner's Policy is typically in the amount of the purchase price of your home. You get it by paying a one-time fee on the day of closing. This policy insures you for as long as you own the home and it passes to any heirs who may inherit the property from you. It protects you financially and will sometimes provide legal defense in the event of forgery, undisclosed heirs, mistakes made during the title examination process, errors or omissions on the deed, and other covered problems that may occur. The Owner's Policy is not automatically provided and you need to make sure that you request the policy and know who will be responsible for paying. It is always a one-time fee that will protect you and your heirs who hold some interest in the subject property.


The loan company's policy

Practically all lenders will require a Lender's Title Policy when making a home loan. This policy does not protect the home buyer in any way. Many buyers wonder, "What is title insurance for the lender when I already have a policy?" It is for the dollar amount of the loan and decreases in coverage as the loan is paid down. It protects the lender financially in the event some unforeseen problem with the title arises and you are no longer making loan payments to them or, due to some title issue, they are unable to sell the property after foreclosure to recoup the loan amount. The Lender's Title Policy goes away when the loan is paid in full.


Title insurance when refinancing

Even if you refinance with the same bank that originally made the home loan, they will most likely require another title search and Lender's Title Policy. You will still be protected by the original Owner's Policy that was purchased when you closed on your sales transaction. You may ask, "What is title insurance covering when I refinance?" It is possible that you had some work done on the house and incurred a mechanic's lien or had a judgement placed against you for child support or unpaid taxes after your home purchase. In case any of those things occurred, the lender will need a new policy when you refinance.


Additional things to remember

Who pays for the policy may vary by state. Regardless, you have the right to choose the title company when you are paying for the policy. You can research title companies online to see what previous customers have to say about them. To know what is title insurance protected and what is not covered, contact the underwriter for a copy of your policy. Standard Owner's Policies will protect you from the most common and frequent title issues. For an additional fee, expanded coverage is available to protect you in such situations as your home construction not complying with home owner's association restrictions.

Integrated Disclosures : A Crash Course

A recent study by Nationwide Economics shows the housing market is stronger than it has been in the past 14 years. Confidence in the economy continues to improve as more

people are able to find work. As people began feeling more positive about their financial future, they are returning to the pursuit of one of their most significant life-long goals: home ownership. More than half of home buyers each month are first-time buyers. Part of the Consumer Financial Protection Bureau's (CRPB) ongoing effort to protect the public and help them realize their financial goals is the implementation of the TILA-RESPA Integrated Disclosure. It is part of your responsibility as an adviser and real estate agent to clearly explain the new rule in an easy-to-understand manner.

Purpose of the TILA-RESPA Integrated Disclosure rule

The Consumer Protection Act directed the CFPB to establish forms that would combine disclosures for people when they apply for a mortgage. This covers forms required by the Truth in Lending Act, also known as Regulation Z, and the Real Estate Procedures Act, known as Regulation X. In the past, many home buyers were confused and overwhelmed by the amount of paperwork quickly forced on them by unethical people in the lending industry. This led to predatory lending practices and many people with mortgages on their homes that they could not afford to repay. It was a key contributor to the housing market collapse. The TILA-RESPA Integrated Disclosure Rule is meant to simplify and improve the method of supplying information to home buyers. Providing information to borrowers about their rights and responsibilities in clear language empowers borrowers and gives them more opportunity to make informed decisions they will feel good about for many years.

What the rule does

A new form called a Loan Estimate replaces the form required by the Truth-in-Lending Act (TILA) and the Good Faith Estimate required by RESPA. If the borrower is working with a mortgage broker, the actual lender is still responsible for making sure the borrower receives their Loan Estimate. The Integrated Disclosures rule applies to practically all closed-end consumer mortgages, but not to reverse mortgages, loans secured by a mobile home or other residence that is not attached to real property, equity lines of credit, or loans made by creditors who make five or less mortgages a year. With the exception of charging for the cost of a credit check, lenders can not charge borrowers any fees until the borrower has received their Loan Estimate and made the decision to proceed with the loan process.  

The Loan Estimate

Lenders are required to provide consumers with a Loan Estimate when that consumer has given the lender the following information: The consumer's name, social security number, and income. The property address, estimate of value for the property, and the loan amount the borrower seeks. The TILA-RESPA Integrated Disclosures Rule removes other information, called "other relevant information" that was allowed under RESPA. Lenders may collect any additional information needed for extending credit after they have provided the Loan Estimate upon receiving the initial six pieces of consumer information.

The Closing Disclosure

This new document replaces the final document required by the TILA and the HUD-1 settlement statement that has always been required by RESPA. The new Closing Disclosure is five pages and provides consumers with the actual terms of their purchase transaction. The consumer has three days to review the Closing Disclosure before the loan is finalized. If the Closing Disclosure is mailed to the borrower instead of hand-delivered, the three day review period begins three days after it was mailed. The Closing Disclosure must reflect all actual cost of the transaction. If there are any changes in amounts prior to or after the closing, the lender must provide the borrower with a corrected Closing Disclosure with the actual amounts. All amounts must be documented in writing and not delivered verbally.