Buyer needs 2 types of title insurance

Borrowers can get two kinds of title insurance when they buy or refinance a home. One is required by the lender, but it's better for the consumer to purchase the other one, too.

Q. I am purchasing my first home. My mortgage broker says I should purchase two different title-insurance policies -- one for the bank and the other for me -- but I think he is only trying to increase his profits by selling me "extra" insurance that I do not need. What do you think?

A. Your broker is giving you wise advice, rather than trying to fatten his profits. In fact, mortgage brokers are forbidden by law to "mark up" the title-insurance costs for their borrowers.

Your question, though, illustrates the fact that a lot consumers still don't fully understand how title insurance works.

Title insurance essentially protects the policyholder from a loss sustained by a "defect in title." For example, if you buy a house today and someone sues next year because he 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 a judge.

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

If you want the same type of protection for yourself, you'll need to pay an additional $500 or so one-time fee for a separate "owner's title insurance" policy that can reimburse you for your personal financial losses (and usually your legal fees) if a future title claim proves successful.

Though most banks require borrowers to pay for lender's title insurance before a home loan is granted, 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 policy provides -- especially now that home prices still hover near all-time highs -- paying a few hundred dollars for a separate owner's coverage is a wise idea.

Q. I was involved in a serious car accident earlier this year and have been unable to work ever since. I continued to make my $1,400-a-month mortgage payments until September, when I could afford to send the bank only $700 because my savings are almost gone. Instead of accepting the partial payment, the bank returned my check with a letter stating that I must pay the full $1,400 immediately (plus a late fee) or else my loan will be in default and that the lender may start foreclosure proceedings. Isn't the bank legally obligated to accept my partial payment? What should I do next?

A. I'm sorry to hear about your current problems and hope that both your health and financial situation improve soon.

Unfortunately for you, the bank is not required to accept any amount that's less than the $1,400 a month that you agreed to pay when you signed your original mortgage contract. It's noble that you at least tried to make a partial payment, but you're still in default of your contractual obligations -- just as you would be if you didn't try to make a payment at all. This means that the lender has the right to levy a late fee, and eventually to begin foreclosure proceedings if you don't quickly bring your scheduled payments up to date.

Now, here's the good news: Most lenders have always been willing to work with borrowers who run into financial trouble due to unexpected circumstances, such as a health condition that prevents them from working or a job-layoff in an area where unemployment is unusually high. Those same banks are even more anxious to work with troubled owners today, in part because the entire lending industry is under close scrutiny from government officials and because banks themselves want to stem the rising number of costly foreclosures.

Call your bank's customer-service office immediately to explain your problems and to ask what type of financial relief might be available. The lender might very well be willing to temporarily reduce or even suspend your monthly payments until you get healthy again and regain your financial footing.

You'll probably have to complete a lot of paperwork to qualify for such help, but the time you spend filling out the bank's forms should be a good "investment" if it helps you avoid a foreclosure that will result in the loss of your home and a long-term scar on your credit report.

© 2007, Cowles Syndicate Inc.