Hazard Insurance – If I change it, will it affect my mortgage?

If you are like everyone else, you have at least one New Years’ resolution.  Some choose weight loss, others fiscal awareness, other personal awareness, etc, etc.  If one of your resolutions is to lower your monthly costs and you are looking at changing your hazard / homeowner’s insurance, make sure you talk to your mortgage company.  

Why, you ask?  Well, you want to make sure you have enough insurance to meet the lender’s guidelines and the lender has notice of your insurer.  

What do you mean by "having enough insurance to meet the lender’s guidelines"?

If you change your insurance (lower your coverage), then there is a possibility you no longer have the amount of coverage required by your lender. Your lender is guided by the type of loan you have and specific guidelines provided to the bank either internally or by the government. You can contact your lender to get the list of requirements/guidelines for your coverage, so you can make sure you get the insurance that is best for your budget AND meet those requirements.

Why does it matter is I change insurance companies as long as I have the same or better coverage?  

In the documents you typically sign when getting a loan, there is typically a document stating you will keep your insurance intact and you will provide the lender proof of insurance – regardless of whether you have your insurance paid out of escrow or you pay the insurance directly. The lender will need to make sure the new company and the new policy meets the appropriate guidelines. The lender will also be checking to make sure it is listed on your policy as a mortgagee and the mortgagee clause is correct.

(Please note that the lender is focused on the fact that you are changing your insurance company. Does not matter if you are leaving your coverage the same, increasing coverage or decreasing coverage.)  

What happens if I do not contact the lender when I change to a new insurance company?  

The lender usually checks on insurance annually – whether you have a current policy and it has the appropriate coverage. If the lender checks in with the old company, it is likely the old company will report they no longer insure your property. When this happens and no new insurance company information has been provided to the lender, the lender will send a letter to you allowing you to provide proof of insurance. If you do not respond to this letter, the lender will put into place its own insurance – forced-place insurance is not easy to get removed.  

What is the bottom line?

When and if you change your hazard/homeowner’s insurance, call your lender to make sure those changes will not affect your loan servicing.

What does it mean when my DC property is classified as Class 3?

As a real property owner in the District of Columbia, the last thing you would ever want or need is for the Department of Consumer and Regulatory Affairs to classify your property as Class 3 – Vacant Real Property.

That's because the DC Office of Tax & Revenue assesses properties classified as vacant nearly six times the rate of a residential real property. So instead of paying $0.85 per $100 of assessed value, Class 3 property owners pay $5 per $100. (Still not as bad as a Class 4 or "blighted property" classification, which is assessed at $10 per $100.)

While the policy overall has helped the city clean up rundown houses and revitalize neighborhoods, occasionally it can lead to headaches for property owners such as someone who bought a fixer-upper that hasn't been occupied for some time.

Our office deals with these types of situations from time to time. Here are some examples of questions people call in with. If you have other questions, feel free to contact us. 

Click beyond the jump to continue reading the Q&A

Q&A: Do I really need a land survey?

Q. What is a location survey?

A. A location survey is a sketch or drawing that shows the boundaries of a particular property. Also, the survey typically includes the dimensions of the house, patio or any additions as well as the locations of fences and any easements or rights of way. Mortgage lenders generally require a survey before lending on a purchase transaction. However, if you are paying cash and not obtaining a loan, you can choose whether or not to obtain a survey. 

Q. Why should I want to obtain a location survey?

A. A location survey defines exactly what it is that you are buying. Just because the back yard has a fence, doesn’t mean that you own everything inside the fence (or that you might not own something outside it). Over the years we have seen many buyers surprised to find out that: 

  • they did not own the driveway, 
  • their house was over the property line, 
  • the neighbor’s fence was inside their yard, 
  • their fence was outside the property lines, 
  • half of what they thought was their back yard belonged to a neighbor,  
  • and countless other complicated scenarios.

Q. Doesn’t the legal description on the deed list the property being conveyed?

A. Yes, but legal descriptions are sometimes wrong. We have seen legal descriptions that have included public alleys and incorrect property dimensions. The survey helps as a check to make sure that the correct legal description is listed. When it is incorrect, a new description is prepared, with the help of the surveyor. 

Q. When do I get to look at a survey?

A. Federal Title & Escrow Company sends out the location survey to the buyers and the buyer’s agent as soon as it becomes available. This way you will have a chance to review it and you can address any issues and/or concerns prior to settlement. The closing attorney will also review the location survey with you again at the closing. 

Maryland’s Non-Resident Withholding Payment

* Editor's Note: As of 2016 the amount of tax required to be withheld is 7.5 percent of the "total payment" to a nonresident individual and 8.25 percent to a nonresident entity. For the most up-to-date information regarding Maryland withholding requirements, visit the Maryland comptroller website.

Sure, a seller would expect to pay various closing costs at the time of closing such as transfer taxes, real estate commissions, and settlement fees. But if you are a seller of a Maryland property, you may not be prepared for the possibility of an additional day of closing line item charge known as a non-resident withholding payment.

While the payment amount withheld is not the actual tax owed, Maryland law requires a non-resident seller of real property to remit an estimated payment to cover any possible tax implications incurred as a result of a gain on the sale. This means the settlement company will withhold 7.5% (or 8.25% if seller is a business entity) of a seller’s net proceeds (total payment) and remit the payment to the Comptroller of Maryland.

The following Q&A should help you determine whether a seller is subject to the requirements of the withholding payment:

Q: Is the seller exempt from the withholding payment?

A: If the seller can answer “YES” to one of the following questions then the seller will not be subject to the withholding payment:

  • Are you, the transferor (seller), a resident of the State of Maryland?
  • Although you, the transferor (seller), are no longer a resident of the State of Maryland, is this property your principal residence as defined in IRC 121 and recorded with the State Department of Assessments and Taxation?

Q: If the seller does not qualify for either of the exemptions, is it still possible to avoid or reduce the amount of the estimated withholding payment at the time of closing?

A: Yes. If the seller believes there is no capital gain on the sale or the capital gain is less than the amount required to be withheld (7.5% of total payment (net proceeds)), a nonresident transferor/seller can submit an Application for Certificate of Full or Partial Exemption (Form MW506AE) to the Comptroller requesting that the withholding amount be calculated based on the capital gain. However, the application must be received by the Comptroller no less than 21 days before the date of closing.

Q: If the seller is not exempt and is subject to the withholding, will the seller eventually receive a refund from Maryland for the withholding?

A: Maryland law requires a nonresident individual to file an end of the year income tax return for the year in which the sale occurred. The filing of this return will determine whether any gain has been realized on the property sale and the resulting tax liability (if any) will be paid from the withholding payment. Any balance remaining after deduction of the tax liability will be refunded from the withholding payment by the Comptroller of Maryland.

Q: What if, among multiple sellers (owners) of the same property, some are exempt while others are not?

A: The residence of the owners of the property will be determined separately. Withholding is required from each of the nonresident owners based on the total payment (net proceeds) that represents the ownership percentage of each of the nonresident individuals.

Q: If the seller is a non-resident personal representative of an estate, is the seller subject to the withholding requirements?

A: The personal representative is a fiduciary and acts on behalf of the estate. If the decedent was domiciled in the State of Maryland at the time of death, the personal representative (fiduciary) can declare as a resident of the State of Maryland and avoid the withholding requirements. The residence of the personal representative is not the determining factor.

Q: If the seller is a business entity, how is it determined whether the business entity is a resident or non-resident entity of the State of Maryland?

A: If the authorized representative for the entity can certify that the entity is qualified by or registered with Maryland Department of Assessments and Taxation to do business in Maryland, then the seller entity will be exempt from the withholding requirements.

Title insurance Q&A

What will standard title insurance cost?

Standard Owner’s Title Insurance premium is based on your purchase price. Enter your purchase price and answer a few other questions here to obtain an instant quote for the cost of both standard and enhanced owner’s title insurance.

What would enhanced insurance cost?

Enhanced Owner’s Title Insurance premium is based on your purchase price. Enter your purchase price and answer a few other questions here to obtain an instant quote for the cost of both standard and enhanced owner’s title insurance.

How many claims do you see made against title insurance policies each year, or what percentage would you say?

Matters arising post-settlement covered by the terms of an owner’s title insurance policy occur in approximately 5% of all transactions that we close. Poor record-keeping by local government represents a good portion of these matters which results in such matters as unpaid taxes (tax liens) (i.e., prior years’ taxes not properly reported by the governmental authority). Other common matters include non-terminated lines of credit and previously unreleased deeds of trust (mortgages) of prior owners, mis-indexed judgments/liens against prior owners, unpaid condo/HOA dues, seller fraud (e.g., imposter spouses, acquiring/drawing on/of lines of credit immediately prior to closing), and forgeries/unauthorized deed transfers in the chain of title.

What percentage of your clients buy enhanced vs. standard?

It’s approximately 50/50 for enhanced v. standard.

What percentage of your clients waive/decline owner’s title insurance coverage?

Less than 1% of homebuyers decline owner’s title insurance coverage.

I've read the descriptions of the two types of insurance on your website and I'm still trying to determine if it's worth it for me to buy owner's title insurance. Am I insuring against the possibility of losing my home or against the legal fees I might have to pay to get the title cleared? Do you have more details/ fine print on the two policies than what is on the website?

You are insuring against the potential of both (title failure and legal fees to defend title).

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Our blog contains general information only, not intended to be relied upon as, nor a substitute for, specific professional advice. Rate tables and figures that appear on our blog are deemed reliable but not guaranteed. For current rates & policies, refer to our Quick Quote and Consumer Guide. We accept no responsibility for loss occasioned to any purpose acting on or refraining from action as a result of any material on our blog.