Why Do You Need Title Insurance?

If you have ever purchased a house by a realtor and with a mortgage, then you have seen a title commitment. This is a “bill of health” from a title insurance company, alerting you to who owns the character you are purchasing and to any liens, mortgages, or encumbrances on the character. It is basic that you get a title commitment and title insurance.

A typical sales agreement requires the seller to give the buyer a “warranty” deed. The information “warranty” method that the seller is guaranteeing to the buyer that he/she owns the character, that it consists of the legal description set forth in the title commitment, and that the liens, encumbrances, and mortgages will have been discharged at the time of closing so that the character is transferred without any baggage. As an aside, if the sales agreement was signed by one person but the title commitment indicates that there are two owners of the character, both of the owners must sign the closing documents for the sale to be consummated. If the character is owned by an estate (because the owner died), the personal representative may need to get a court order to acquire the authority to sign a deed on behalf of the estate. If the character is owned by a corporation, then a majority of the shareholders must consent to the sale by a corporate resolution for the sale to be effective.

When there is no title insurance guaranteeing the legal description, the legal owner, and the absence of encumbrances at the time of closing, the buyer usually gets a insignificant “quit claim” deed. This method “buyer beware”-in spades. The buyer may later have a claim for fraud against the seller, but that method a lawsuit and possible problems with collecting on a judgment. If, however, you have title insurance and discover that the legal description was wrong, the seller did not have the right to sell the character, and/or liens or other encumbrances were not disclosed or not discharged, you can file an insurance claim and hopefully be paid almost closest.

When you buy character, especially if it has been foreclosed or you are buying it as a “short sale,” be sure to get a title insurance commitment. The commitment provides direction for what needs to 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, that indicates the last date that title to the character was checked. You can request that the title commitment be “updated” to the date of the sale. If it is not and you accept a commitment with a stale date, then you may not be able to complain if the IRS filed a lien against the character the day before the sale, and the title company did not discover it. Because title insurance companies are connected these days to the Register of Deeds office, it is not burdensome for them to do a last minute check.

As a last issue, when character has been foreclosed, there is a “redemption period” (generally six months) after the sheriff’s sale during which the owner can “redeem” the character. To redeem, the owner must go to the Register of Deeds office with a cashier’s check for the amount paid at the sheriff’s sale plus the interest that has accrued since the sale. If the owner manages to sell the character during this redemption period, that may produce enough money to redeem the character. The problem is that if the character is redeemed, then all of the mortgages or liens that were recorded after the foreclosed mortgage was recorded are reinstated and keep attached to the character.

For example, assume the following:

On January 5, 2008, Bank of America recorded a $100K mortgage loan to the owner.

On September 9, 2009, Quicken Loans recorded a $50K secured equity line.

On March 2, 2010, the IRS filed a lien for $100K.

If (a) Bank of America foreclosed on the $100K mortgage loan; (b) Bank of America “bid” $100K at the sheriff’s sale (and then offered to cancel the mortgage in exchange for the character); and (c) the owner did not redeem the character-then the later Quicken Loans’ loan and the IRS lien will be extinguished. Bank of America will own the character outright.

If, however, a) Bank of America foreclosed on the $100K mortgage loan; (b) Bank of America “bid” $100K at the sheriff’s sale (and then offered to cancel the mortgage in exchange for the character); and (c) the owner did redeem the character -then the later Quicken Loans’ loan and the IRS lien keep an encumbrance against the character. If someone bought the character during the redemption period, already in a short sale, that person would have paid something to the owner to buy the character but would have truly purchased character nevertheless unprotected to the $50K secured equity line and the $100K IRS lien. Only the complete running of the redemption period extinguishes later liens, mortgages, and encumbrances unless those later lenders or lien holders agree to release their interest in the character. If you are nevertheless dealing with the owner of foreclosed character, the character is undoubtedly nevertheless in the redemption period-and consequently you MUST BEWARE!!

It is imperative that purchasers of real estate acquire 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 is not true.” While in most real estate deals the seller pays for the title insurance, there is nothing to prevent a buyer from obtaining title insurance himself. At the minimum, a buyer should acquire a title search of the character (current to the date of sale) before any buy.

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