Thursday, April 28, 2005

Buying Title Insurance: What You Need to Know

RealEstateJournal | House Talk By JUNE FLETCHER: "Question: I am buying a new home. Do I need title insurance?

-- Virginia, Dunn Loring, Va.

Virginia: Yes, Virginia, assuming that you're financing this home, you do need title insurance. In fact, your lender will insist on it -- and you'll have to pay. The policy protects the lender (but not you) should there be any claim on the land from former owners -- say a divorced woman whose ex-husband forged her signature on a quit-claim deed, a mechanic's lien from an unpaid subcontractor or a long-lost heir. It's a good idea to get a separate owner's title-insurance policy to protect yourself, too, because such claims can emerge years after you've settled in, remodeled your basement and put in the petunias. Should anyone ever lodge a claim to your property, the insurer will cover the costs of any legal proceedings and settlement amounts. Coverage lasts as long as you own the property.

So deciding whether to get title insurance is a no-brainer. Figuring out what you should pay, however, is more complicated. Some states including Virginia, set the cost of title-insurance premiums, and you can't negotiate them. But in most other states, you can shop around for the best rates (if you're buying a property that was sold a few years ago, you may be able to get a discounted "reissue" rate from the title company that currently covers the property).

How you pay varies, too. In some places, the title company is paid directly; in others, the cost of the title search and insurance is folded into the fee of the attorney handling the settlement. Depending on where you live and the value of your home, the total cost of both a lender's and an owner's policy should range between about $400 and $1,400. Ask your real-estate agent what practices prevail locally, and what insurance costs have been for similar homes sold in that neighborhood. Start shopping around as soon as you get your good-faith estimate of loan costs, which the lender must provide you within three days of your application.

Whatever you pay, however, it's quite possible that it will be too much. Federal and state regulators are currently taking a close look at the title-insurance industry to uncover kickback schemes, where insurance companies split premiums with home builders, real-estate brokers and others who steer business their way. Title-insurance executives say that the practice, called "captive reinsurance," splits the risk of future claims with their partners and does no harm to consumers.

But regulators argue that the risk of future claims is actually low -- 96% of policies never have claims against them, and in some places, insurers pay as little as two cents of every premium dollar to settle claims. Furthermore, to get their business, some title companies shower real-estate agents with illegal inducements, like gifts, food, entertainment and even business-support services, according to California Insurance Commissioner John Garamendi, who has been holding hearings this week on industry practices.

What can you do about this? Not much. But you can insist that your lender guarantee any fees listed on your good-faith estimate of closing costs. You should question anything that seems fishy, such as a big difference between the good-faith estimate and your final settlement costs, or numerous, inexplicable "junk fees." Don't just pay meekly and forget about it. Contact the Real Estate Settlement and Procedures (RESPA) Unit, Department of Housing and Urban Development, 451 Seventh St. SW, Washington, D.C., 20410.

-- Ms. Fletcher is a staff reporter for The Wall Street Journal. Her "House Talk" column appears most Fridays on E-mail her your questions about the residential real-estate market. Please include your first name and city and state. If your question is answered and posted, we will show your first name and city. Due to volume of mail received, we regret that we cannot answer every question."

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