Why does a home buyer need title insurance? Here is one example: Imagine you just signed a contract to purchase a house. Since you are not flush with cash, you need to secure a home loan, so you contact a bank to get the process started. The bank requires that a title exam be performed by your closing agent and nothing of any concern shows up. You feel comfortable proceeding to closing and paying the purchase price to the sellers: a veteran and his wife. At closing, the wife is nowhere to be found, and the veteran husband seems anxious to close the deal. At this point, you start to sense something unusual, but you chalk it up to nerves. You sign, and the house is yours. …Except it isn’t. The calls and emails start coming in. It turns out there is sizable VA loan mortgage on the property in the seller’s name. And as it happens, the seller used to actually work for the U.S. Department of Veterans Affairs, where he obtained a set of release papers and forged the release of his mortgage by signing his ex-wife’s and a notary’s names on the deed. So the title seemed to be released when in fact you, your closing agent and your bank, have been victimized by an elaborate scam. What are you supposed to do? Believe it or not, this situation and situations like it do happen. Either due to willful misrepresentation or a naïve mistake, sellers sometimes transfer property they have not fully paid off or do not have the authority to sell. And because title searches are not infallible, title defects can sometimes go undetected until you and the bank are embroiled in a messy financial and legal quagmire, having just lost tens or hundreds of thousands of dollars. Title insurance is meant to ameliorate these kinds of scenarios. The beauty of title insurance is that in insures against issues that have occurred in the past and may have passed by unnoticed. If you have been a victim of fraud or oversight regarding the title to your home, you can file a claim and insurance will compensate you for your covered loss, up to amount of insurance policy (typically the purchase price of your home). Otherwise, the insurance company will step in and hire a lawyer to rectify the situation through mediation or legal defense. When errors occur, title insurance addresses the financial and legal hurdles between you and your property. If a document has been mis-indexed in the land records, for instance, insurance would track down the file and take care of any monetary damages. Or, take the example I laid out in my previous article: you are about to buy a house, but only four out of five heirs signed the deed, so the title is invalid and requires one more signature. Here, title insurance would step in to help pay off the mortgage and induce all heirs to appear and sign in court. The other beneficial aspect to title insurance is that you only pay it once, upfront at closing. Cost depends on the state and county in which the property is located, as well as the sale and loan amount. Coverage varies only slightly across the board, but buyers should make sure to purchase policies that cover the entire cost of the property. Additional coverage is available for buyers looking to protect against inflation. If a bank involved in the transaction—and one most always is—the bank will require and mandate that both lender and borrower obtain insurance typically at the borrower’s expense. Yes, the bank requires that it be insured as well: consider who has more at stake when you first buy the house. Buyers and lenders title insurance coverage is typically purchased simultaneously in a package deal. Looking for more information about title insurance? Need advice before you purchase a new home? Talk to an attorney. Offit Kurman’s Real Estate Law and Transactions Group assists buyers and sellers on myriad real estate matters, from drafting and negotiating contracts to assisting with financing and zoning issues. Learn more about the practice group here. If you have a question about title insurance or any other real estate legal matter, click here to get in touch with me.
ABOUT DAVID SEVERN
firstname.lastname@example.org | 240.772.5114 David A. Severn has been practicing law in Frederick MD, since 1980 and focuses his practice on land use, development and real estate. He represents clients in all aspects of the zoning and land use process appearing regularly before planning commissions, boards of appeal and legislative bodies of Frederick County, Washington County and their municipalities. He has served as lead counsel in numerous large and complex development projects including “Carroll Creek Park” a mixed use, public-private partnership re-development project in historic downtown Frederick modeled on River Walk in San Antonio, “Frederick Crossing”, the first large mixed use commercial retail/employment center in Frederick County and the redevelopment of the Frederick Towne Mall. David also works for the public sector in serving as legal counsel to the Town of Walkersville, the City of Brunswick, Frederick County and Washington County Public Schools for real estate and land use matters. You can also connect with Offit Kurman via Facebook, Twitter, Google+, YouTube, and LinkedIn. WASHINGTON | BALTIMORE | FREDERICK | PHILADELPHIA | WILMINGTON | VIRGINIA