Things Not to Do Before Purchasing a Home

Debt-to-Income Ratios and Car Payments

You see, when determining your ability to qualify for a mortgage, a lender looks at what is called your "debt-to-income" ratio. A debt-to-income ratio is the percentage of your gross monthly income (before taxes) that you spend on debt. This will include your monthly housing costs, including principal, interest, taxes, insurance, and homeowner’s association fees, if any. It will also include your monthly consumer debt, including credit cards, student loans, installment debt, and….
…car payments.

How a New Car Payment Reduces Your Purchase Price

For example, suppose you earn $5000 a month and you have a car payment of $400. Using an interest rate of 8.0%, you would qualify for approximately $55,000 less than if you did not have the car payment.
Even if you feel you can afford the car payment, mortgage companies approve your mortgage based on their guidelines, not yours. Do not get discouraged, however. You should still take the time to get pre-qualified by a lender.
Next, you contact a loan officer to get prequalified for a mortgage loan. You state your desired price and how much you can put down. You provide your income and may even supply pay stubs and W2 forms. The loan officer methodically crunches the numbers (by telephone, in person, or even over the internet).
However, if you have not already bought a car, remember one thing. Whenever the thought of buying a car enters your mind, think ahead. Think about buying a home first. Buying a home is a much more important purchase when considering your future financial well being.
Do not buy the car. Buy the house first.

No Major Purchase of Any Kind

Review the article titled, "Don’t Buy a Car," and apply it to any major purchase that would create debt of any kind. This includes furniture, appliances, electronic equipment, jewelry, vacations, expensive weddings…
…and automobiles, of course.

Don’t Move Money Around

When a lender reviews your loan package for approval, one of the things they are concerned about is the source of funds for your down payment and closing costs. Most likely, you will be asked to provide statements for the last two or three months on any of your liquid assets. This includes checking accounts, savings accounts, money market funds, certificates of deposit, stock statements, mutual funds, and even your company 401K and retirement accounts.
If you have been moving money between accounts during that time, there may be large deposits and withdrawals in some of them.
The mortgage underwriter (the person who actually approves your loan) will probably require a complete paper trail of all the withdrawals and deposits. You may be required to produce cancelled checks, deposit receipts, and other seemingly inconsequential data, which could get quite tedious.
Perhaps you become exasperated at your lender, but they are only doing their job correctly. To ensure quality control and eliminate potential fraud, it is a requirement on most loans to completely document the source of all funds. Moving your money around, even if you are consolidating your funds to make it "easier," could make it more difficult for the lender to properly document.
So leave your money where it is until you talk to a loan officer.
Oh…don’t change banks, either.

Choosing Between Mortgages

One of the most critical aspects to the process of purchasing a home, besides choosing the actual home, is deciding which type of mortgage will best suit the consumer. Most mortgages are made for 15 or 30 year loans. That can be a long time to be tied down to a payment. The loan applicant will need to take into consideration how much money they can qualify to borrow, how much they have to set aside for payments and whether they are comfortable taking a risk with a variable interest rate loan.
Many consumers want the reassurance they will be able to access the lowest interest rates at all times. A fixed rate mortgage will not allow this. With a fixed rate mortgage, the interest rate remains at whatever the prime rate was when the loan was originated, for the duration of the loan; even if that is 30 years. A variable rate mortgage loan offers more flexibility but also more risk. With a variable interest rate loan, the consumer will be able to take advantage of lower interest rates if the prime rate falls. This can be a substantial amount of savings over the course of the loan. There is a risk, however that the prime rate will rise, which means the homeowner will be paying more money in interest on the mortgage loan. The fixed rate consumer does not have this concern.
There is a compromise between the fixed rate mortgage loan and the variable rate mortgage loan. A capped loan allows consumers to access lower interest rates if they become available, but protects them from high interest rates above a certain limit. Another compromise is a discounted mortgage. In this type of mortgage loan, the consumer takes out a mortgage for a variable interest rate loan. While the interest rate will fluctuate in accordance with the current prime, the interest rate the consumer pays will always remain a certain number of points below whatever the current prime rate is.
While it is important for the consumer to shop around for the best interest rate, the lowest interest rate is not always the best. Lenders, like other companies, rely on competition and advertising for their business. Some banks and lending institutions will advertise a phenomenally low interest rate in order to attract prospective borrowers. The interest rate may be as much as a few points below what other lenders have offered. Consumers should be aware, however that this low interest rate may come with a high price tag. In order to makeup for the lost revenue of the low interest rate, lenders will include restrictions and penalties in the terms of the loan. Frequent restrictions included limiting the attractive low interest rate to only a portion of the entire length of the loan, such as one to three years. After that time period, the interest rate will rise to the current prime rate at the time. Another common restriction allows the lender to charge a penalty to the consumer should they decide to refinance the loan with another lender at a later point in time. The penalty is often so cumbersome it makes the savings of refinancing minimal.
Finally, lenders may try to make up the difference by requiring the consumer to purchase home insurance through them, rather than allowing them to shop around for competitive rates. Provided there are no requirements or penalties attached to a low interest rate, it can be quite advantageous for a consumer to shop around before making a final decision on a lender.
The prospective homebuyer will also need to make a decision between a 15 year mortgage and a 30 year mortgage. Both have advantages and disadvantages.

Are Short Sales A Good Bargain?

By JR Hevron, Published: March 25, 2011
In this economy, where many homeowners are desperate to sell their homes, short sales can be a great bargain for the well-informed homebuyer.

“A short sale,” according to Greater Minneapolis/St. Paul realtor and real estate blogger Tom Sommers,“is when the seller is saying to the bank, “we can’t afford to stay here due to financial hardship. Can you let us sell it for less than we owe?” That’s what creates the short.”

 

The bank often agrees to the short sale because it guarantees, even at a loss, a larger percentage of money back. Also, the bank doesn’t have to go through the expense of the foreclosure process and doesn’t have to kick anyone out of their home.

A short sale can also keep the property in better condition than a foreclosure, which is good for the bank and the homebuyer. “Lots of times short sale homes are in better condition,” says Sommers, “because the people are still living in them and are not wrecking the house.”

 

Many homeowners who face foreclosure take out their frustration on the lender by damaging the property. This might include expensive but easily repairable damage like removing valuable appliances or fixtures, but can also include breaking windows, cutting up carpets, and in some extreme cases—dumping powdered concrete down drains and toilets!

 

The best way to take advantage of the benefits of a short sale is to find an agent who understands the foreclosure process. The timeline may change from state to state, but the facts are essentially the same. A person can try to sell their house as a short sale at any time. However, if a house is in foreclosure and there has been a sheriff’s sale, there is a six-month redemption period for an inhabited property between the sale and when the property gets turned over to the winning bidder.

 

Any time during that redemption period, the homeowner can try and sell it. An owner can try to pay what they owe and get the house out of redemption and keep the home. Most people want to try to short sale it, though. However, the minute that redemption period is up, it’s fully foreclosed. It doesn’t matter if a buyer has a purchase agreement on it or not because the seller has no right to it anymore.

 

“The earlier that you can get to a property in a short sale situation before a sheriff’s sale,” says Sommers, “the bank is going to be more willing to go through the short sale because they haven’t invested as much money to go through the foreclosure. So, it gives you more time to have a successful process so that you can have a close.”

 

This all highlights the need for an agent who has a deep understanding of the process and knows just when to jump in. “Let’s say you have three houses that are the same price, same area, same amenities and everything,” says Sommers. “One of them is not even at the sheriff’s sale yet, the second one is halfway through the redemption period, and the third one’s only a month from redemption. Even though all three look alike, the first one that hasn’t even hit the sheriff’s sale is your best bet.”

 

It’s also important to have a knowledgeable agent when it comes to understanding the terms of your purchase. “You have all of these other contingencies like the short sale contingency addendum that you not only need to understand before you sign, but you also want to make sure that you have all of the necessary information in front of you. If you’re not used to doing short sales, you could call and not get the information that you need.”

 

In addition, you should also speak to an attorney and a tax person to review any documents and give you advice before you sign anything. “As a real estate agent, that’s something I can’t do,” says Sommers. “I can’t give you legal advice and I can’t give you tax advice.”

 

Lastly, it is the nature of the short sale that sometimes, no matter how talented and experienced an agent is, a deal can fall through. “There are so many great agents out there who do wonderful work on short sales,” says Sommers,”but their hands are tied because the bank or an investor or whomever makes a decision and just says “no.””

 

A homebuyer who is shopping for a short sale should expect the whole process to take at least four months. Ultimately, this wait is worth it. “I think that short sales wonderful,” saysSommers, “as long as you go into it knowing that you have to be patient, because it’s the patience that pays off.”

 

5 Tips for Buying a Foreclosure Home

By JR Hevron, Published: March 23, 2011
Homebuyers looking for a bargain by purchasing a foreclosure should educate themselves on the process ahead of time.

In this market, many homebuyers looking for a bargain consider purchasing a foreclosure. Their thinking is that they’ll accept a house that needs a bit of work in exchange for a big discount.

 

While there are some deals to be had on foreclosure houses, it pays to educate yourself on the purchase process ahead of time. “A lot of people are in love with the idea of a foreclosure because it sounds like a great deal—and it can be,” says Greater Minneapolis/St. Paul realtor Tom Sommers. “But at the same time you have to be willing to do some work on the home, even if it is as little as carpet and painting.”

 

Sommers shared a few points on the foreclosure purchasing process:

 

1) Figure out if a foreclosure home is for you.

While a foreclosure home sounds like a good idea, it’s not right for everyone. Who is it not right for? “Probably someone who is a first-time homebuyer that doesn’t want to do any amount of work at all and just wants to physically move into a property,” says Sommers.

 

To make sure that the homeowner is prepared for a foreclosure purchase, Sommers often takes clients out to see foreclosure properties as well as regular residential properties in the same price range. “I usually encourage homebuyers to look at anything in their price range. If the foreclosures seem to be too much for them, they usually figure that out on their own.”

 

2) Find an agent who specializes in foreclosures.

The do-it-yourself mindset of someone who wants to purchase a foreclosure home might lead them to think that they can take that same approach to finding and closing the deal on a foreclosure home. A foreclosure home is not a normal purchase and having an experienced person walk you through the process can be extremely helpful.

 

“I’m here to safeguard you and minimize your risk by making sure that you understand what you’re getting into,” says Sommers. “That includes making sure that you have the right title people, a good closing team, and help putting everything together so that you have the best experience.”

 

One issue that people without an agent face is losing a house because all of the paperwork isn’t in order. “The advantage of working with a professional like myself is that I know the process inside and out,” explains Sommers. “The key to getting a foreclosure is having your offer written correctly the first time.”

 

It is also key to have someone who can follow through for you. “Having someone on your side who is representing you will ensure that after the offer is presented and the bank gives you a verbal acceptance, there will be a follow up with the listing agent to make sure that you get a signed purchase agreement.”

 

The purchasing agreement is not something for amateurs to take on. “There are so many contingencies in a purchase agreement,” says Sommers. “Not only is it my role to make sure that you are aware of and understand the contingencies in a purchase agreement, it’s also my role to make sure that these contingencies are met properly so that you don’t lose your hard earned money or that the deal doesn’t fall apart over something that could have been avoided.”

 

3) Have all of your financing worked out ahead of time

As with any purchase of residential real estate, you should have your financing worked out before you start looking for a house. It’s important to figure out what you can pay every month before you start the house hunting process so that you don’t fall in love with a house (foreclosure or not) that you can’t afford. “You don’t want to buy something that is out of your comfort zone for what you want to spend monthly. It’s not a good deal if you are house poor,” says Sommers.

 

You should also get prequalified so that you can quickly jump on a bargain foreclosure if it does come your way. “Make sure that you get a really good loan officer and get a prequalification so that when you do find the home that you want to buy,” says Sommers, “you have all of your information right in front of you and you are able to put together an offer right away.”

 

4) Educate yourself on 203(K) financing.

If you decide to purchase a foreclosure that a bank does not consider inhabitable because it lacks toilets or carpeting or needs other work, you will likely need to get a 203(K) mortgage that allocates funds for the repairs.

 

“Right now, that seems to be the best option and it’s a wonderful program,” says Sommers. If you are going to use the 203(K) program, be sure to have a knowledgeable loan officer who can to explain everything about the loan. “Also, make sure that you get several different bids from several different contractors,” says Sommers , “because once you’ve chosen the contractor and you’ve had the bid submitted and you get the money for the 203(K), you are locked in.”

 

5) Consider traditional residential real estate.

In this market, you might as well take a serious look at traditional real estate as well. “The sellers of traditional real estate have realized where we are in the market, so they have really adjusted their prices a lot,” says Sommers. “You can get a nice, single family home at a reasonable price and still end up getting a deal. It’s not a foreclosure, and you won’t have any issues because there’s no work to do and you can literally just move right in.”

 

After all of this, you may be wondering if foreclosure properties are still a deal. “I do still believe that there is an advantage on the foreclosures,” says Sommers. “If you are still looking strictly from a pricing standpoint, you are going to get typically a better deal. It’s like anything else, though, you have to have an agent going through with you and taking care of everything ahead of time to let you know if it really is a good deal in the long run.”

 

7 Hidden Costs Of Home Ownership

By JR Hevron, Published: March 11, 2011
The cost of home ownership is more than just your mortgage payment. Take note of these seven hidden costs and be prepared for the actual payments.

When you are looking for a mortgage, there is a huge difference between what you qualify for and what you can afford. Unfortunately, many lenders and online calculators use the terms “afford” and “qualify for” interchangeably. They are not the same thing!

 

“If the bank tells you that you can afford a mortgage of $1500 a month,” says Gil Bricault, a broker associate at The Family Team at Coldwell Banker Cahoone in Westerly, Rhode Island, “that may be technically true. But if that’s really the maximum that you can pay, there’s really no slack, no room for error—especially if you have a bad month or if you or your partner loses your job.”

 

Some say that you should add 40% to your base mortgage payment to get the amount that you will eventually pay. Just like with online calculators, it’s a good figure to start with. In the end, though, to figure out the amount that you will actually end up paying on a monthly basis, you’ll need to do a much more nuanced calculation. Sadly, there is no easy, cookie cutter method for figuring this out.

 

Read on for seven costs that you should factor into your final equation when budgeting for your monthly expenses:

 

1) Emergency Fund

While an emergency fund isn’t a monthly payment, per se, it is something that you should be contributing to regularly. “The first advice that I give to buyers,” says Gil Bricault,” is to not cut themselves too short when they are budgeting a down payment. They should make sure that they have at least two to four thousand dollars in some sort of emergency fund.”

 

Again, there’s no cookie cutter formula for how much you should have on hand in your emergency fund. Keep in mind, though, that if you live in a more expensive house, everything is going to cost more to fix.

 

Also, when thinking about how much to save, consider the age of your house. “If you buy a 35-year-old home with a 35-year-old heating system with a 20-year-old roof, there’s a greater probability that something will go wrong than if it was a brand new home,” says Bricault. “The older the house, the more money that I would have available.”

 

2) Maintenance

The expense of monthly house maintenance is something that pays off long term. Things that are small problems today become big problems tomorrow—then you’ll really need to tap into that emergency fund.

 

Things that come under the topic of regular maintenance include lawn, landscaping, pest control, and repairs (plumbing, broken faucets, windows, etc.). This cost is going to vary month to month, but $100 is generally a good average amount to set aside.

 

In terms of preventative maintenance, you should also have your heating/ac system looked at twice a year to make sure that it is working properly. The cost of the inspections will take care of problems before they get bigger and will save you money on monthly cooling and heating costs with a more efficient system.

 

Some other things to think about: if you don’t have public water, you should be testing your well every year for bacteria; if you have a private septic system, you should plan to empty it every couple of years.

 

3) Utilities

Utilities are a monthly expense that is at least a little bit more predictable. However, if you’ve been a renter up till now, you may end up paying for more than you are used to. Plan to pay for electricity, heating, cooling, water, and sewer.

 

To get an estimate, ask local utility companies to provide you with the monthly average utility bills for the seller. Keep in mind that these figures may not be completely representative. “You need to think in terms of who has been living in the house,” advises Bricault. “If you’ve got three teenage girls and the previous tenants were a middle-aged couple who was out of the house all of the time, your water bill might be twice as much.”

 

Overall, cover yourself by budgeting more for utilities than you think that they’ll cost. “I think you’ll always find that your heating cost runs a little higher than you thought,” says Bricault. “Add 10-15% in your mind. If you think it’s going to be $1000 a year on heating oil, it’s probably going to be $1150.”

 

4) Property Taxes

This is another more predictable monthly cost. However, don’t just go on what is quoted on the house listing. That figure is often based on the old assessed value of the house. Call your county property assessor's office to get a more accurate estimate. Local tax rates vary, but your home is typically taxed on its assessed value, an amount that is equal to a fraction of its appraised value, which can change.

 

In this economy, you can expect regular increases in your taxes. “Taxes are going to go up. Real estate taxes, particularly,” says Bricault. “I don’t know of any communities out there that are not in trouble. At the end of the day, somebody has to write the check and it’s always on the back of the homeowners. When you look at the rate of the growth in taxes, it’s far above the rate of inflation. Just assume that there are no bargains in taxes and they’re only going to go up.

 

5) Insurance

Homeowner’s insurance protects you from fire and theft. Flood insurance is a whole different policy and you may be required to purchase it if you live in a flood-prone area.

 

Again, what the current homeowner has the house insured for may be irrelevant. “You should get a quote up front,” says Bricault. “The bank is going to want the house insured to at least the mortgage value and we always recommend to our clients that they get it insured to the replacement cost. Get an actual quote or you could be in for a big surprise.”

 

If you couldn’t pay the full 20% of the value of the house for your down payment, you’ll also need to purchase private mortgage insurance, which will add to your monthly charges. It’s one reason among many to wait till you have that 20% before getting a mortgage.

 

6) Association Fees

If you are purchasing a home in a subdivision, a condominium, or even an apartment, you may have to pay association fees or maintenance fees to keep up the common areas and pay for shared expenses like lawn mowing, security, or a front-desk attendant. These fees vary, but can add up to more than $100 a month.

 

7) Home Improvements

Here’s another cost that’s hard to predict. Once you own your own home and can do pretty much whatever you want with it, you’re going to get the urge to upgrade, replace, and paint things.

 

For this one, the costs are not just in cash, but also in your time. Home improvements take a lot of time and work and if you are a new homeowner, you will likely do a lot of them yourself. You have to consider how much you get paid and whether it is better to spend that time making more money or paying somebody to do the upgrades for you.

 

Thinking about the hidden costs of home ownership is not fun. It’s necessary to budget for them, though, or you might end up unable to make your payments at some point down the road.

 

Buying a home is such an emotional decision,” says Bricault. “It’s kind of like falling in love, but at some point you have to become objective. None of these expenses are reasons not to buy a house. I still think that you’re better off controlling your future by owning, but I think that you have to go into it with both eyes open.”

 

Ultimately, your realtor and broker should help you to figure out these hidden expenses. “If you’ve got a good realtor and a good mortgage company,” says Bricault, “they’ll touch on all of these things.” How do you know if you don’t have a good realtor or mortgage company? “Simple. You'll know if they talk more about the house and not about you and your finances!”

Mortgage Rates Impacted by Japan, March 15, 2011

By David Coster, Published: March 15, 2011
Mortgage rates will plunge today as the stock market sells off dramatically following a worsening crisis in Japan.  The danger of a major radiation leak from the damaged nuclear reactors seems to have increased.  The potential impact of such an event on the global economy is very difficult to predict.
Mortgage Rate Trend Direction:     Down
Economic Reports/Rate Impact:    New York Empire Index, 8:30 AM ET, Moderate Rate Impact
                                                                Import Prices, 8:30 AM ET, Moderate Rate Impact
Key News:                                           Japan, Saudi Military in Bahrain
SummaryAll eyes and ears are focused on news out of Japan this morning as evidence of a worsening nuclear crisis emerges to place further stress on a nation still searching for survivors or victims of the earthquake and tsunami. The impact on the Japanese economy will be severe.  How this translates into an impact on the global economy and the US economy is a huge unknown.  Today, traders are playing it safe and moving into assets like bonds, including mortgage-backed securities.  Consequently, mortgage rates are moving lower today.
Impact of economic reportsThe economic data released today, while generally positive is being completely drowned out by the events in Japan.  A statement by the US Federal Open Market Committee of the Federal Reserve will be watched closely for its analysis of the economic impact of the events in Japan.
Impact of international or political eventsContainment of the nuclear reactors that were compromised is the biggest challenge, among many, facing the Japanese government and people.  It will likely be several days more before the full extent of the tragedy is known, keeping markets in a similar posture as today.
In Bahrain, where unrest is intensifying, reports that Saudi Arabia has sent 1000 troops and that one of those troops may have been killed, demonstrate how precarious this situation is as well.  Should the unrest move across a short bridge into Saudi Arabia and then threaten the flow of oil its impact on the world economy could be catastrophic.

Questions About Title Insurance

What Is Title Insurance?

Title insurance is protection against loss arising from problems connected to the title to your property.
Before you purchased your home, it may have gone through several ownership changes, and the land on which it stands went through many more. There may be a weak link at any point in that chain that could emerge to cause trouble. For example, someone along the way may have forged a signature in transferring title. Or there may be unpaid real estate taxes or other liens. Title insurance covers the insured party for any claims and legal fees that arise out of such problems.

Is Purchasing Title Insurance Obligatory

It is if you need a mortgage, because all mortgage lenders require such protection for an amount equal to the loan. It lasts until the loan is repaid. As with mortgage insurance, it protects the lender but you pay the premium, which is a single-payment made upfront.

Does Title Insurance Do Anything For Me?

The required insurance protects the lender up to the amount of the mortgage, but it doesn’t protect your equity in the property. For that you need an owner’s title policy for the full value of the home. In many areas, sellers pay for owner policies as part of their obligation to deliver good title to the buyer. In other areas, borrowers must buy it as an add-on to the lender policy. It is advisable to do this because the additional cost above the cost of the lender policy is relatively small.

Doesn't the Lender Policy Indirectly Protect Me?

No, title policies are indemnity policies, they protect against loss, and a lender policy would only cover the lender's loss. Of course, the fact that the insurer issued a policy to the lender indicates that the title has been searched and nothing amiss has been found, but no search is 100% dependable. That is why an insurance policy is issued.

When Does Title Insurance Protection Begin and End?

With the exception noted later, title insurance only protects against losses from claims that arose prior to the date of the policy. Coverage ends on the day the policy is issued and extends backward in time for an indefinite period. This is in marked contrast to property or life insurance, which protect against losses resulting from events that occur after the policy is issued, for a specified period into the future.

For How Long Is the Property Owner Purchasing Title Insurance Covered?

Indefinitely. The owner’s protection lasts as long as the owner or any heirs have an interest in or any obligation with regard to the property. When they sell, however, the lender will require the purchaser to obtain a new policy. That protects the lender against any liens or other claims against the property that may have arisen since the date of the previous policy.
For example, if the contractor you failed to pay for remodeling your kitchen places a lien on your home, you are not protected by your title policy; the lien was placed after the date of the policy. You will probably be required to get the lien removed before you can sell the property. But in the event the lien hasn’t been removed and a search has failed to uncover it, the new lender will be protected by a new policy.

Will Title Insurance Protect Me Against False Claims That Arose After I Purchased the Property?

The standard policy does not, which is a weakness. Many events beyond your control can reduce the value of your house after you buy it. If it is a newly-constructed house, sub-contractors claiming they had not been paid by the builder may place a lien on the house. Identity theft can result in a new mortgage you know nothing about. A neighbor could build on your land without your knowledge, thereby adversely possessing and possibly eventually taking your land. Or you may suddenly be told that you must correct a zoning violation of the previous owner.

To deal with these issues, a new policy with expanded coverage has been developed. I am told it is virtually standard in California and is available in many other states, perhaps at a small price increase. It is usually referred to as the ALTA Homeowner’s Policy.

Does Title Insurance Coverage Rise With Increases in the Value of My Property?

No, but coverage under the ALTA policy referred to above increases by 10% a year for the first 5 years after issuance, to 150% of the initial amount. You can buy additional coverage as a rider to the policy.

If your policy does not have such a rider and your property has appreciated sharply in value, you may be able to purchase additional coverage on the same policy by paying an incremental fee. The fee should be modest because because no new title search is involved. The coverage will only apply to title defects that existed prior to the original date of the policy. To extend the coverage to events that may have clouded the title since the original policy, you would need to take out a new policy with a new search and pay the full rate.

Why Do I Need to Purchase a New Policy When I Refinance?

You don’t need a new owner’s policy, but the lender will require you to purchase a new lender policy. Even if you refinance with the same lender, the existing lender’s policy terminates when you pay off the mortgage. Furthermore, the lender is concerned about title issues that may have arisen since you purchased the property, such as the lien mentioned in an earlier question. A new title search will uncover the lien, and you will have to pay it off as a condition for the refinance.

Insurers generally offer discounts on policies taken out within short periods after the preceding policy. In some cases, discounts are available as far out as 6 years from the date of the previous policy. Ask for it, it may not be offered if you don't.

Does the Fact That Title Insurance Companies Pay Out Very Little in Claims Indicate That it Is Overpriced?

No, it may be overpriced, but not for that reason. Because title insurance protects against what may have happened in the past, most of the expense incurred by title companies or their agents is in loss reduction. They look to reduce losses by finding and fixing defects before the policy is issued, in much the same way as firms providing elevator or boiler insurance. These types of insurance are very different from life, property or mortgage insurance, which protect against losses from future events over which the insurers have no control.

Are Title Insurance Premiums Fair to Low-Income Borrowers?

Probably they are more than fair. Most title insurance costs arise in preventing loss rather than paying claims, and prevention costs are not much different for a small policy than for a large one. Despite this, premiums are scaled to the amount of the mortgage or the value of the property, which suggests that smaller policies may be under-priced and larger policies overpriced.

Does Title Insurance Guarantee Me That I Will Be Able to Sell My Property If An Unforeseen Claim Arises?

No. Title insurance does not prevent loss of marketability due to a title claim, any more than fire insurance prevents fire. If a claim arises, you probably won’t be able to sell your property until the claim is settled by the title insurer. The interest of the owner and the insurer may clash in such cases. The owner usually wants settlement immediately, whereas the insurer wants to minimize the cost of settlement, which may require time-consuming negotiations with the claimant.

Why Are There Such Large Variations in the Cost of Title Insurance in Different Parts of the Country?

One major reason is that the services covered by the title insurance premium vary in different parts of the country. In some areas, the premium covers not only protection against loss but also the costs of search and examination, as well as closing services. In other areas, the premium covers protection only, and borrowers pay for the other related services separately.

To complicate it further, in some states the charges for title-related services are paid to title insurance companies, which perform the functions but charge separately for them. In other states, borrowers may pay attorneys or independent companies called abstractors or escrow companies.

Of course, what matters to the borrower is the sum total of all title-related charges. These also differ from one area to another in response to a variety of factors. The 50 states have 50 different regulatory regimes, which affect charges. So do local costs, competition in local markets, and other factors. This is a largely unstudied segment of the economy that would make a nice PhD dissertation for a student in economics!

Does a Borrower Have the Right to Purchase Title Insurance on Her Own?

Yes, although few exercise it. Most leave it up to one of the professionals with whom they deal – real estate agent, lender or attorney – to select the carrier. This means that competition among title insurers is largely directed toward these professionals who can direct business rather than toward borrowers. This has begin to change with the development of the internet, however, and one new insurer has emerged to market directly to borrowers. See Buying Title Insurance on the Web: Entitle Direct.

If a Borrower Does Shop For Title Insurance, Would it Pay?

Perhaps. It is difficult to generalize because market conditions vary state by state, and sometimes within states. You would be wasting your time shopping in Texas and New Mexico because these state set the prices for all carriers. Florida also sets title insurance premiums but not other title-related charges, which can vary.

In the remaining states, the situation is murky and it may or may not pay to shop. Insurance premiums are the same for all carriers in “rating bureau states”: Pennsylvania, New York, New Jersey, Ohio and Delaware. These states authorize title insurers to file for approval of a single rate schedule for all carriers through a cooperative entity. Yet in some there may be flexibility in title-related charges. More promising are “file and use” states – all those not mentioned above -- which permit premiums to vary between insurers.

Are Title Insurance Premiums Deductible?

 

Under existing rules, they are not. If the tax code was logically consistent, however, premiums paid by borrowers on lender policies -- those that protect only the lender -- would be deductible. The same is true of mortgage insurance. See Are PMI Premiums Deductible?