“My husband and I bought a piece of property in November 2001, and had to buy title insurance. We began building in December 2003 and we had to purchase a new policy in connection with our construction loan. Now we are near completion and getting ready to convert the construction loan to a permanent loan and again we are being told we need title insurance. That will make three policies with premiums totaling about $9,000 in less than three years. Is this really necessary?”

The way the system works, three policies are necessary, but you should be getting substantial discounts because of the short time periods involved.

A lender policy is not transferable. Hence, when you pay off one mortgage and take out another, the new lender wants a policy covering him. Even if the new lender is the same as the old one, that lender is going to want protection for the period since the previous policy.

Title insurance insures against events that might prejudice your title to the property that occurred before the date of the policy. This is just the opposite of other types of insurance, which insure against events that occur during some specified period beginning after the date of the policy.

This means that the lender who makes your permanent loan, even if he also made the construction loan, is not covered for anything that might have happened to your property after December 2003, the date of the last title policy. This is not much of a risk. The period involved was short, and since the house was under construction, you had little opportunity to do anything that would prejudice the title.

I would guess that if the lender had to pay the premium, he wouldn’t bother, but since you are the one who must pay, why not? This is a good reason why lenders ought to be required to pay the premiums for lender title policies. Not only would redundant policies be avoided but premiums would fall.

A tile insurance insider to whom I showed your letter pointed out to me that if the lender making your loan had to sell it in the secondary market, the requirements of secondary market investors would dictate the required title coverage. That is true, but if lenders were required to pay for title insurance, the secondary market would develop a very low-cost way of covering very small risks.

Meanwhile, the best you can do is negotiate the largest discount possible. Remember that it won’t necessarily be offered to you if you don’t ask.

Are Debt-Phobic Borrowers Good Risks?

“I grew up in a financially disorganized home and became phobic about debt. While in college I refused to take out any loans and worked three jobs to avoid having to borrow. I pay all my bills on time and there isn’t one negative item in my credit report. However, there are no positives either. I plan on starting my house hunting next year, and my credit score is very low. My friend said that I need to stop paying things off, but this makes me nervous. It’s hard to believe that I must get into debt in order to prove I can work my way out of debt.”

Believe it. Credit grantors are not looking for borrowers who are phobic about debt. They reason that debt-phobic borrowers may be that way because they can’t handle debt, like alcoholics who don’t drink because they can’t handle alcohol.

Credit grantors want to lend to people who have demonstrated that they have the capacity to handle debt. The credit-scoring systems they use base scores largely on how well borrowers have done in servicing debt. These scores are highly predictive: the higher the score, the lower the probability the borrower will default.

If you are going to be a mortgage borrower, you should get your feet wet by borrowing small amounts for short periods, before repaying in full. Credit cards are ideal for this purpose. Start paying merchants with a card. This will cause your credit score to rise gradually, and also give you confidence that you can use debt without losing control.

The writer is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.


What’s your opinion? Send your Letter to the Editor to newsroom@inman.com.

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