Many new mortgage professionals and homebuyers often ask, "Is title insurance really necessary?" In fact, to many, title insurance is a vague and oft misunderstood concept essential to the real estate transaction. Being able to clearly explain this concept to your borrowers is not only responsible as a mortgage professional, but will also help you build trust and rapport. In today's climate, it is more important than ever to maintain an ethical practice and be a knowledgeable professional when educating your borrower in fees associated with, arguably, the most important transaction of his life.
What is title insurance?
Plainly stated, title insurance provides protection to the homeowner against a loss. A loss generally can occur from any problem associated with the title to the property being different than for what it was insured. In actuality, there are many hidden risks that could cause a loss of title or create encumbrances, including, but not limited to:
•Impersonation of the true owners of the land by
•Undisclosed or missing heirs;
•Liens from unpaid estate, inheritance, income and gift taxes;
•Defective acknowledgment, due to lack of authority of notary;
•Descriptions apparently, but not actually, adequate;
•Mistake in recording legal documents;
•Fraud, duress or coercion in securing essential signatures;
•Deeds by persons of unsound mind; and
•Invalid, suppressed, undisclosed and erroneous interpretation of wills.
What types of policies are available?
It should be noted that there are three types of policies generally offered by your title company.
Traditionally, for loans more than $100,000, a lender's policy is required. The lender's policy only protects the lender against loss suffered if there is a claim.
Basic owner's policy
The owner's policy is required of a buyer to protect his investment in the property. This policy would provide clear title coverage to the property and protect against some of the listed hidden risks, including missing parties to a deed, use restrictions, easements, fraud and forgery.
Enhanced owner's policy
The enhanced owner's policy may cost slightly more than the basic owner's policy, but will include additional coverage regarding zoning violations, building-permit violations and encroachment removal.
Is title insurance really needed?
To some borrowers, many of the mentioned problems may seem highly unlikely. They may even balk at its importance, even after you have explained to them what it is. They may even assume that it is an ancillary fee or believe that the title is free and clear because the company charged with doing the search of land records would not permit the transfer without any issues being resolved. Sadly, in many cases, this is simply not true.
Due to human error, a search may not always be as thorough as assumed and flawed. A simple error, such as a misspelled legal description or an overlooked lien by a title examiner, can generate a claim. These mistakes are normally not malicious, but rather just human occurrences that happen from time to time through the process.
By acquiring the owner's policy, the borrower would be protected against these inaccuracies for at least the value of the property.
Still not convinced?
Given the current market conditions and claims on the rise, title insurance is more important than ever.
It is unfortunate, but with mass foreclosures looming on the horizon, many homeowners who are caught in this position are desperately trying to avoid further negative financial consequences by unloading their homes as quickly as possible.
In desperation, some have been led to take measures that can be of an unscrupulous nature. It should come as no surprise that some are finding ways to otherwise defraud and to take advantage of the recent misfortune. Despite a title insurance company's greatest efforts to catch and avoid such situations, your borrower should be aware that some may slip through the cracks.
In the event that your client is unknowingly subject to these dealings, title insurance can provide the peace of mind to your client that he will be protected.
As real estate professionals, it is our responsibility to understand the products we are selling and educate the consumer. Now is a great time to help improve the image of our industry. Extend your part by educating your clients, and you will find that not only do you become a credible resource, but also a professional that your clients will trust and refer.