Dear Mr. Azrael:
I need some advice concerning title insurance.
My wife and I are scheduled to close on a newly built home that is situated on a 1.15 acre lot. This lot is comprised of four adjoining lots that were purchased, combined and retitled last summer.
We were told that our lot would have had a thorough title search done by the builder prior to obtaining the building permit. One of the mortgage brokers we interviewed stated that in Maryland, a homebuyer cannot be forced to purchase title insurance.
However, both my current broker and the settlement company say that the insurance is required to protect the lender. The settlement company quoted $1,200 for the title insurance on a $220,000 mortgage loan.
I was told by my broker that the lender may cancel the loan if I refuse the insurance.
What is your advice?
Title insurance companies offer policies that insure owners or lenders. They also may issue an owner's policy and a lender's policy at the same time. Although a homebuyer cannot be required to purchase owner's title insurance, the lender almost always requires the homebuyer to purchase lender's title insurance as a condition of the loan.
Title insurance guarantees against title defects, forged deeds, prior liens and other title risks. Lender's title insurance guarantees the mortgage lender that it is in a first lien position and that prior liens and mortgages - including the builder's construction loan mortgage - have been paid and released as to the insured property.
A homebuyer who does not buy owner's title insurance does not receive these guarantees and, if a title problem arises, must rely on any rights against the seller of the property.
The premiums for title insurance in Maryland are filed with and approved by the state insurance commissioner. The lowest approved rate for standard lender's title insurance is $2.50 per $1,000 of coverage for the first $250,000.
Owner's standard title insurance carries a rate of $3.50 per $1,000 of coverage for the first $250,000. Higher rates apply to "enhanced" title insurance policies, which offer more coverage than standard policies.
When an owner's policy is purchased, a lender's policy usually will be issued simultaneously for a nominal charge. In addition to the title insurance premium, the settlement company may charge for its services, such as title examination, settlement fees, document preparation and out-of-pocket expenses. By law, these charges must be itemized on the settlement statement.
You are free to shop the $1,200 price quoted by a settlement company. Competitors might charge less for their services, even though the title insurance premium is the same. Usually, the one-time premium difference between an owner's policy and a lender's policy is not significant, and a homebuyer is well advised to obtain owner's title insurance.