Don’t Bet the House – Never Opt Out on Title Insurance

It is the stuff of nightmares and law school exams – the ways that a homeowner could lose his or her home due to a title problem. The American Land Title Association has stated that one in three title searches reveals a serious title issue affecting the property. That is why it is so critical to get owners title insurance when you buy a home.

When the TRID rules came into effect in 2015, the way we closed residential mortgage loans changed dramatically. One of the key changes was replacing the HUD Settlement Statement with the Closing Disclosure – often called the CD. The goal of the TRID rules -and we can argue if that was actually achieved – was to provide better disclosure of fees and costs to the consumer borrower. One of the new concepts in the CD  was to show more clearly that the buyer is not legally obligated to purchase an owner’s title insurance policy by splitting the title insurance premium into a separate line item for the lender’s title insurance policy premium – and a separate line item labeled “optional” for the owner’s title policy. This results in the majority of the title premium cost being allocated to the lender’s policy – and a much smaller share to the owner’s policy.

Identifying the owner’s title policy as optional – with the result that an uninformed buyer/borrower might actually decide not to obtain an owner’s title policy to save some money – is a recipe for disaster!! If a home buyer opts out – and a title issue is discovered post-closing – the bank will be covered but the home buyer will not. The lender’s title policy does not cover the home buyer. In a hypothetical case – if post- closing it was discovered that a lien had been overlooked or that someone with a legitimate claim to the property emerges – the lender’s title insurance policy will make the lender whole. But an owner who did not have a title policy could suffer a complete loss – losing the property and his equity.