Why do you need title insurance?

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If you have ever purchased a home through a real estate agent and with a mortgage, then you have seen a title compromise. This is a “health certificate” from a title insurance company, telling you who owns the property you are buying and any liens, mortgages, or liens on the property. It is essential that you obtain a title commitment and title insurance.

A typical sales agreement requires the seller to give the buyer a “guarantee” deed. The word “guarantee” means that the seller is guaranteeing to the buyer that he owns the property, which consists of the legal description set forth in the title commitment, and that liens, liens, and mortgages will have been released at closing time for that ownership be transferred without any baggage. Also, if the sales agreement was signed by one person but the title commitment indicates that there are two owners of the property, both owners must sign the closing documents for the sale to be consummated. If the property belongs to an estate (because the owner is deceased), the personal representative may need to obtain a court order to obtain the authority to sign a deed on behalf of the estate. If the property is owned by a corporation, then a majority of the shareholders must consent to the sale through a corporate resolution for the sale to be effective.

When there is no title insurance to guarantee legal description, legal ownership, and the absence of liens at closing, the buyer usually obtains a “get out of claim” master deed. This means “buyer beware” in spades. The buyer can later file a fraud lawsuit against the seller, but that means a lawsuit and potential problems with collecting a judgment. If, on the other hand, you have title insurance and find that the legal description was incorrect, that the seller had no right to sell the property, and/or liens or other liens were not disclosed or released, you can file a claim. sure and hopefully it will pay off almost immediately.

When you buy a property, especially if it has been foreclosed on or if you are buying it as a “short sale,” be sure to obtain a title insurance commitment. The compromise provides guidance on what must be done to remove liens, encumbrances, and mortgages from the public record. The commitment, however, can “expire”. There is a date, usually at the top, indicating the last date the title of the property was verified. You can request that the title commitment be “updated” to the date of the sale. If not, and you agree to a past due date commitment, you may not be able to file a complaint if the IRS filed a lien against the property the day before the sale and the title company did not discover it. Since title insurance companies are connected to the Registrar of Deeds office these days, it is not a burden for them to do a last minute check.

As a final matter, when the property has been repossessed, there is a “redemption period” (usually six months) after the sheriff’s sale during which the owner can “redeem” the property. To redeem, the owner must go to the Registrar of Deeds office with a cashier’s check for the amount paid at the sheriff’s sale plus interest that has accrued since the sale. If the owner is able to sell the property during this redemption period, that can generate enough money to redeem the property. The problem is that if the property is redeemed, any mortgages or liens that were recorded after the foreclosure was recorded are reinstated and remain attached to the property.

For example, suppose the following:

On January 5, 2008, Bank of America recorded a $100K home loan for the homeowner.
On September 9, 2009, Quicken Loans posted a $50K secured principal facility.
On March 2, 2010, the IRS filed a lien for $100K.

If (a) Bank of America foreclosed on the $100K home loan; (b) Bank of America “bid” $100K at the sheriff’s sale (and then offered to forfeit the mortgage in exchange for the property); and (c) the owner did not redeem the property, then the subsequent Quicken Loans loan and IRS bond will be forfeited. Bank of America will be the sole owner of the property.

If, on the other hand, a) Bank of America foreclosed on the $100K home loan; (b) Bank of America “bid” $100K at the sheriff’s sale (and then offered to forfeit the mortgage in exchange for the property); and (c) the owner redeemed the property; then, the subsequent loan from Quicken Loans and the IRS lien remain a lien against the property. If someone purchased the property during the redemption period, even at a short sale, that person would have paid the owner something to purchase the property, but would have actually purchased the property still subject to the $50K secured equity line and lien. from the IRS of $100K. Only the full execution of the redemption period extinguishes subsequent liens, mortgages, and encumbrances unless subsequent lenders or lien holders agree to release their interest in the property. If you are still dealing with the owner of the repossessed property, the property is most certainly still in the redemption period and therefore YOU MUST BE CAREFUL!

It is imperative that real estate buyers obtain title insurance and the wisdom of a good title insurance company. As they say, “If it’s too good to be true, then it probably isn’t.” While in most real estate deals the seller pays for the title insurance, there is nothing to prevent the buyer from obtaining title insurance on their own. At a minimum, a buyer must obtain a title search on the property (current on the date of sale) prior to any purchase.

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