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Title Insurance - What Does It Cover?

by Edmond
(USA)

If the title company searches and misses an existing mortgage, is the title insurance obligated to cover it?

=====ANSWER=====

Hello Edmond,

Well this is a very good question. First I must get the disclaimers out of the way. I do not work for a title company nor am I able to offer legal advice.

With that said, I can tell you a little story about a home purchase I made a long time ago and how the title company handled it.

First off, everybody knows that title insurance is required by the lenders before they will issue a new mortgage when a property is sold and changing hands. The lender wants to be sure that they will have clear title and be able to put a 1st lien position on the subject property.

Title insurance is paid by both the buyer and the seller in most if not all cases. The whole purpose is to insure all parties that no other liens such as state property taxes, water department, city taxes, mowing, IRS and any other liens for that matter are left on the property.

Before any lender will close on a mortgage for a property they will require these liens are paid off.

So if the title company misses a lien, well they are now on the hook for it since that is what they got paid to insure against for the protection of the lender, seller and buyer.

Now how do I know this? I bought a foreclosure property one time a number of years ago. I rehabbed it and got it ready to sell.

Once I sold it, the buyers real estate agent selected the title company as this is how it happens quite often. So the title search is done and the results show that the house is free and clear. In fact, I had paid $85,000 cash for it.

When I bought and closed on the property, I had a title search done to protect myself to be sure I owned it outright and there were no liens. I owned the house for about 6 months which is how long it took me to fix it up to make it resalable.

I paid my property taxes at the closing which I owed according to the title search results. Taxes are prorated here in Michigan and I had to reimburse the seller any taxes they paid in advance up to the day of closing.

Anyway, to make a long story short, the title company missed some of the taxes that were due when I bought the house. Then after I sold it, they tried to go back on the buyer and collect them.

I get this call from the buyer several months after the closing telling me I had to pay the taxes since he was not the owner of the property for the tax period which was not paid.

I told him to relax, I would look into it. I called the title company to find out what was going on.

They informed me they had missed some county taxes on the search which amounted to around $1800. They ask me to pay them since I was the owner of the property and had a moral obligation to pay my taxes.

So I reminded them that both the buyer and myself paid them over $2000 for title insurance and that they could pay the taxes since this deal was closed already and it had been several months.

They tried to pressure me into paying the taxes, they already pressured the buyer but he was not about the pay them either.

So neither on of us paid the taxes, the title company had to since it was their mistake.

Now when it comes to a mortgage lien that has not been paid off, well I'm sure the title company will try not to pay up, but from my experience I do not think they can escape it. However, with the fancy attorneys on their staff I'm certain they will wiggle big time and try to get out of it. Some fine print or something will come out of the wood work.

Likely it would turn into a big legal battle between the title company and the lender who has the lien position they missed and did not get paid. The lender deserves to be paid, so someone will have to do it.

If the closing has not taken place yet, well I'm willing to bet the title company will simply not close at all if the parties do not agree.

One thing for sure, it will not be the buyers problem if that is the position you are in.

Hope this helps.

Please let me know how this comes out. I'm very interested. Also, I invite any comments by real estate or title people who are reading this blog. Let me know what you think.

Cheers,

Jeff



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Insurance
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Explain title insurance and title opinions

by John
(Arkansas)

My wife and I are planning to buy a house in the near future and I have been doing some research to find out the costs involved besides buying the property itself.

I have a pretty good understanding of most of the requirements like appraisals and home inspections, as well as income verification and credit checks, but I’m not sure about one of the items.

In fact, I have seen one lender that would do away with this requirement if an alternative was provided. I’m talking about title insurance. Every single lender except one required title insurance.

The one lender that did not absolutely require title insurance gave me a list which mentioned something about a title opinion as an alternative to purchasing title insurance. It seems like a title opinion might be a cheaper option.

My wife’s brother is a lawyer and his law firm is located near the town where we are wanting to buy. I think he or someone in his firm could do the title opinion for us instead of getting the title insurance.

Also, I’m not really sure if this is something that we are supposed to buy or if the property owner is supposed to get it for us.

Is title insurance really insurance? Who is the beneficiary of the insurance? Is it the lender? Or are my wife and I the beneficiaries? Or all of us? Could you tell me if title insurance or a title opinion is better? Which is more expensive? Could you explain these things please?

===ANSWER===

Hello John,

Great questions! Let me take each question and break it down.

1) Is title insurance really insurance?

Yes, it is insurance to the lender that the property has clear title. But, it protects you as the buyer and the seller also.

You see, if for some reason a lien shows up on the property after closing, the title insurance is responsible to take care of that since they missed it during the title search. That's how it protects the buyer and the seller.

I actually had this happen to me on a home I sold. It turns out there were back taxes owed in the amount of around $1,900. They were not paid during the final closing process. I was none the wiser to it.

Then the buyer calls me around a year later and wanted me to pay them. I refused considering it was not my mistake, nor was it his.

After refusing to pay the taxes which the title company told me I had a moral obligation to do, the title company had to pay them since it was their mistake.

In my case it paid off as the seller and the buyer benefited also. The taxes were really the buyers since they were property taxes prorated for the year in advance in escrow.

2) Who is the beneficiary of the insurance?

In this case the buyer was the main beneficiary because of the reasons mentioned above.

3) Is it the lender? Or are my wife and I the beneficiaries? Or all of us?

I'll kind of lump these together. All benefit from the title insurance. When you close on the house, you know you have clear title. The lender does not get hit after closing, nor do you and your wife.

As in my experience, the title insurance paid off for all parties except the title company themselves.

What really struck me as funny, the title company tried to make me feel guilty because of their mistake. They were the ones who prepared the closing papers and dispersed the funds to pay taxes, liens etc.

Since they were setting up escrow for future taxes for the buyer, the lender did not have to pay the taxes and then go back and re-do the escrow payments and raise what the buyer would pay each month until it got caught up.

4) Could you tell me if title insurance or a title opinion is better? Which is more expensive? Could you explain these things please?

Again, I'll lump these questions together also.

I think you can see, in my case title insurance was better for all parties involved in the transaction. Of course, with the exception of the title company itself.

Although it was more expensive, since the seller and the buyer both pay title insurance, it did ensure we had clear title. It protected us like any insurance does from a mistake.

Hopefully I explained all this to you so you can understand.

As I think about this, the lender you spoke about that does not require title insurance is asking for trouble in my humble opinion. And even if it saved you a bit of money, the protection from human error is what you are after.

I hope you proceed with caution and consider the possible mistakes that can happen.

If the buyer in the example I'm using here, were you, then you would have to pay the taxes somehow. In our case, the title insurance saved the buyer $1,900. After all it was his taxes the insurance paid, not mine.

On the day of closing, you owe the taxes and not the seller.

If you have any other questions feel free to ask.

Jeff Ragan




Comments for Explain title insurance and title opinions

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Title insurance questions
by: Mike

Wow!!! This really helped me understand title insurance. I can see the value of it now. Thank you so much for such an awesome questions and answers!

title insurance
by: Anonymous

I have a question about title insurance, is it not supposed to make sure that the survey is correct when you sell and buy property, or is it just for liens? I sold some land of mine around 15 or 16 years ago. I have not questioned the survey until recently when I was trying to find my property lines and my neighbor said that isn't where the lines go, and he didn't care what the picture looked like that isn't where the lines go. So, if the picture didn't mean anything, then why put it on there? All it did was make me think that everything was ok and that the lines were where they were supposed to be, now I am finding out that they are not. What if anything can I do?

=====ANSWER=====
Hello,

Title insurance is to insure against and liens on the property. While it is true, they normally have a legal description contain in a policy which is provided by a survey company, I'm not so sure they have any legal obligation is it is incorrect.

I suggest you get a new survey done and have them stake it out so you can determine where the property lines actually are. Yes it will cost some money, buy it can also help you and your neighbor know the boundaries.

Jeff

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