Smart buyers should purchase title insurance

Savvy buyers should always purchase two types of title insurance - one that protects the bank, and a second that protects themselves.

Q. We are buying our first home. Our mortgage broker says that we must purchase a title-insurance policy that protects the bank if a dispute arises, but she's also urging us to buy a separate policy that would cover our own interest in the home. Are two title-insurance policies really needed, or is our mortgage broker just trying to pad her commission?

A. No, your broker isn't trying to boost the commission that she will make when the loan is approved. Instead, she is wisely suggesting that you purchase a second title-insurance policy so that your own stake in the home will be protected if someone else files a lawsuit that claims ownership of the property.

Most first-time buyers, and even some experienced investors, don't really understand how title-insurance works.

A title policy basically protects the holder from a loss sustained by a "defect in title." For example, if you buy a house today and someone (a stranger or even a long-lost uncle) sues two years later because he or she has a deed to the property signed by a previous owner, the home could be taken away from you if the claim is upheld by the court.

There are two types of title-insurance policies. The first, "lender's title insurance," protects the bank against any future claims regarding ownership of the property. Almost every lender requires borrowers to pay the $600 or so for such coverage before making a loan, even though the policy will only reimburse the bank - not the buyer - for losses if a claim is made months or years later.

Should you want the same type of protection that the bank demands, you will need to pay another $500 or so for a separate "owner's title insurance" policy that can reimburse your personal financial losses (and maybe even your legal fees) if a title claim proves successful.

Though most buyers are required to pay for lender's title insurance in order to get a mortgage, purchasing a separate owner's policy is usually an option that the borrower can either accept or reject. But considering the protection that buying an owner's title policy provides, paying a few hundred dollars now for separate owner's coverage would probably be a good idea.

Q. Both my husband and I have very good credit ratings, so we receive two or three letters each week from banks that offer preapproved credit cards. A column that you recently wrote said that people who check their credit frequently can lower their score. Are these offers of preapproved cards hurting our credit score, even though we didn't ask for them? We are particularly worried because we are planning to refinance our house soon and want to keep our high credit rating so we can get the best loan deal.

A. There is no need to worry. Many banks cull credit-score ratings to find consumers with the highest ratings so they can offer new cards or loans to top-ranked borrowers. The type of credit inquiries you're asking about is considered a "soft hit" on your report, which should not have any impact on your overall score.

Most types of soft hits involve inquiries that you did not initiate yourself. They include unsolicited credit-card offers and mortgage deals, such as the ones that you're getting now.

The federal Fair Credit Reporting Act states that a bank's inquires cannot affect your score if you refuse the offer of its new card or loan. But if you accept such an offer, your score will certainly be impacted by the way that you handle the account in the future.

Conversely, too many "hard hits" on your report - inquiries that you personally made to obtain a new loan or credit card - will indeed be recorded by credit bureaus and may affect a lender's willingness to provide you with a mortgage later. Lenders get nervous if they see more than two or three hard hits on your credit file, in part because they think that you may have been approved for a loan that has not yet appeared on your report.

In today's world (thankfully), banks don't want to overextend credit. But stay on the safe side: Don't apply for any new credit-card accounts or personal loans until your new home mortgage is approved.

Q. We purchased our home in 1997 for $172,000, and now we are offering it for sale for $349,999. If we sell it for this price, how much federal taxes would we have to pay?

A. Probably none. The Internal Revenue Service allows married couples to keep up to $500,000 of their resale profit tax-free, provided that they have made the house their primary residence for two of the past five years. Single tax filers who meet the same standard can keep their first $250,000 tax-free. Call an accountant or other tax specialist for more details.

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