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Entitlement to Choose

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Posted On: 06/11/2008

Q: Please help. I may close in 30 days on a 15-year fixed-rate mortgage for $143,000. Do I have a right to choose my own title-insurance provider, regardless of what my broker says?

A: You have the right to choose a settlement provider. You may find settlement providers who charge different fees for a variety of services, but whether you will save money on title insurance is unclear.

When you purchase settlement services the closing agent will sell you a title policy. There is very little, if any, price competition within the title insurance industry because basic minimum rates are often established by state laws. An important exception is Iowa, where the state has a guarantee fund to assure that buyers are protected against title defects.

The result of such arrangements are pretty much what you would expect. As the General Accountability Office has reported:

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“Title insurance differs from other types of insurance in key ways. First, in most property and casualty lines, losses incurred by the underwriter account for most of the premium. For example, property-casualty insurers’ losses and loss adjustment expenses accounted for approximately 73 percent of written premiums in 2005. In contrast, losses and loss adjustment expenses incurred by title insurers as a whole were approximately 5 percent of the total premiums written, while the amount paid to or retained by agents (primarily for work related to title searches and examinations and for commissions) was approximately 70 percent.”

Q: What are the credit ramifications of a short sale and foreclosure?

A: Not good. It is sometimes argued that a short sale or a deed in lieu of foreclosure on a credit report is somehow better than a foreclosure itself. However, Craig Watts, a spokesman for Fair Isaac Corp., developer of the most widely used credit scoring systems, says there’s not enough information in a credit report for mortgage lenders to differentiate between a short sale, deed in lieu or a foreclosure, thus they are typically treated as equally negative.

A foreclosure – or anything that looks like a foreclosure – means that a mortgage was not fully repaid. This is a huge sin in the lending community, one that will likely take several years of good credit to overcome.

However, if you can negotiate a short sale with a lender you may also be able to negotiate what, if anything, is sent to credit-reporting agencies.

Q: I now own an Oregon co-op outright – no mortgage. Would I be eligible for a reverse mortgage since it is considered just owning a piece of stock?

A: It’s estimated that about 90 percent of all reverse mortgage products are backed by FHA insurance, meaning that the loans must conform to HUD standards. According to attorney Dennis Haber, author of “Piggy Bank Your Home: Tap Into The Power Of A Reverse Mortgage” (GH Media, 2008), co-ops cannot be financed with an FHA reverse mortgage under the current rules. However, Haber points out that there are private, non-FHA, reverse-loan products that can be used to finance co-ops in the New York City area.

Four points:

If an FHA “modernization” bill passes Congress, it’s possible that the rules might change so that co-ops nationwide would be able to qualify for reverse-mortgage financing.

Some “lenders” try to sell a reverse mortgage for the purpose of financing an annuity. This combination is rarely if ever in the interest of borrowers because of high fees and stiff withdrawal penalties.

Shop around for the best rates.

Reverse mortgages are complex products. They should not be considered without first getting assistance from an attorney who specializes in elder law. While speaking with an attorney be sure to also ask about wills, living wills and other necessary paperwork.

Q: I have a beautiful home, but instead of selling I’d like to rent for a few years so I have the option of coming back. What do I charge? Do I rent furnished or completely empty the place out?

A: If you’re going to move at least an hour away from the property then you’re likely best served with a professional rental agent. He or she can answer your questions, find a tenant and manage the property.

You need to consider that normal wear and tear can impact the value of your home. Also, be aware that if you have not lived in the property for two of the past five years and sell you cannot shelter as much as $500,000 from capital gains taxes if married or $250,000 if single. Speak with a tax professional for specifics.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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