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3 reasons every homeowner needs title insurance

By   |  Posted in First-Time Homebuyers

Title insurance is one of the more expensive elements of a home purchase or mortgage refinance, and everyone hates paying for it. Some folks even argue that in today's age of computer-stored records, title insurance isn't really necessary. Unlike car insurance or home insurance, very few people know even a single person who has collected on a title insurance policy. However, the robo-signing scandal and the explosion of mortgage fraud make it clear that--given the reliance on computer data--title insurance is more necessary than ever.

Why title insurance matters even more today

Today's housing market makes title insurance more important than ever. Sloppy foreclosure procedures, corner-cutting sellers and flat-out fraud are a growing part of today's real estate world. The only thing standing between you and very heavy losses may be your title insurance policy. Here are three reasons why homeowners need to protect themselves and their investment with title insurance:

1. Mortgage fraud is alive and well. Incidence of mortgage fraud is up following the financial crisis. Some of these fraudulent acts can result in title disputes. According to the latest mortgage fraud report from the FBI, one type of fraud involves faking deeds that get notarized and recorded with the local jurisdiction, where clerks often will not conduct due diligence on that claim. Title insurance would cover you, the rightful owner, in a case like this.

2. The home building industry is in trouble. Financially-troubled developers may resort to shady practices to turn a profit, and unsuspecting homebuyers may be the ones to take the hit. In March 2010, the Texas attorney general charged a home builder, Casa Linda Homes, with knowingly selling homes encumbered with liens. Those who bought homes with cash--meaning no mortgage lenders had insisted on a title policy--found themselves with the strong possibility that they would lose their stakes in their new homes.

3. Mortgage foreclosure procedures can be sloppy. Court challenges to shoddy foreclosure procedures may leave some homeowners exposed. In one landmark case, U.S. Bank v. Ibanez, the Massachusetts Supreme Judicial Court upheld a 2009 ruling against both the bank which had foreclosed on a home and the party who bought the foreclosed home. The court ruled the original mortgage had been transferred to the bank improperly and therefore the foreclosure also was improper, giving the home back to the owner who had failed to keep the loan current.

Legal experts have concluded that because the decision was applied retroactively, many folks who bought foreclosure properties in good faith may no longer own them and, unless they have title insurance, the property could very well revert to the previous owner without compensation.

Title insurance isn't just for your mortgage lender

Don't get confused between the two different types of title insurance. For one, there's the coverage that your lender gets, which insures that the lender's interest in the property has priority over claims from any others. That's not the same as a policy that covers your interest in the property.

If you finance a property, your lender will require that you pay for the lender's policy. It's up to you to add an owner's policy for your own protection.

Here's how to save money on title insurance

While it's foolhardy to save money by skipping title insurance altogether, that doesn't mean you can't save money on your policy.

Your lender will pass along its cost for title insurance to you, but for your owner's policy, you can and should shop around. If you're going to refinance, start with your current title insurer, then check online for more quotes. Many states regulate title insurance premiums.

If you buy both the lender's policy and your policy together, title companies generally offer substantial discounts.

If your property was purchased or refinanced within the last five years, you are eligible to save with what is called a short-term or reissue rate. These discounted rates vary from state to state as well, but range from 5 percent to 60 percent off the standard insurance rate.

Keeping your title charges to a minimum can shorten the breakeven period for a refinance or make a home purchase more affordable. Most people understand the importance of shopping and comparing mortgage rates, but relatively few understand that they could be leaving money on the closing table by not negotiating their title charges as well.

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