“Do I need title insurance?” is one of the most common questions I am asked as a closing attorney. The answer is a resounding YES. Most individuals purchasing a home do not understand what title insurance is or how it can protect them from the issues that frequently arise in connection with a real estate closing. In fact, many of the most common title issues that occur are not anyone’s fault. But without an owner’s title policy, it can create issues for your client in the future. Since most people purchase an owner’s title insurance policy, we are able to rely on that policy to prevent most delays in connection with closing. I hope this article helps educate buyers on the importance of obtaining an owner’s title insurance policy at closing.
What Is an Owner’s Title Insurance Policy?
Traditionally, owner’s title insurance protects buyers from certain unknown defects or issues related to a property’s title. When we use the word “title” that means anything recorded on the real estate public records. Limited warranty deeds, security deeds, affidavits of title, liens and judgments are a few of the types of documents recorded at the clerk’s office in each county a property is located in. Unlike most insurance policies, title insurance offers protection against title issues and defects from the past (in addition to the future, in certain instances).
Lender’s Title Insurance Does Not Protect the Buyer:
If your buyer is utilizing a loan to purchase the property, their lender will require that they purchase a lender’s title insurance policy at closing. Unlike the owner’s title insurance policy, the lender’s title insurance policy is not optional (like an owner’s policy) and will be included as part of a buyer’s cash to close.
I have heard all kinds of things from buyers throughout my career. Many of the things buyers think they know just aren’t true. One of the things I hear every once and a while is “My lender said I don’t need an owner’s title policy because the lender has one.” While it is true the lender makes every buyer purchase a lender’s title policy at closing, a lender’s title insurance policy does not protect the buyer in any way.
Why do lenders require buyers to purchase a title insurance policy for them? Because lenders want to protect their investment in their collateral (the property). If a lender goes to foreclose on a property and there is a title issue, lenders recognize the title insurance policy will help them resolve any such issues so that they can sell the property as quickly and easily as possible. Even with a lender’s title insurance policy in place, a buyer will not receive any coverage for a title defect and will be responsible for clearing such issues before they can sell the property in the future.
A distinction that most people do not appreciate between a lenders and owner’s title insurance policy is that the value of the lender’s title policy actually decreases every month when a mortgage payment is made. While an owner’s title policy NEVER decreases in value (and in fact the policy value actually increases 10% over the first five years following the date of the purchase up to 150% of the purchase price).
The Public Record Is Not Current:
This may be surprising to many, but when you are at a closing in the State of Georgia, the closing attorney cannot see all of the documents recorded at the clerk’s office up to the day of closing. This period of time is known as the “gap period.” While our title exams are comprehensive, we can only review and clear title issues that are visible on the public record at the time the title exam was completed.
But how does that happen? Counties update their real estate records daily, but as we all know, only so much can get done in a day. That means that when we check the public record, the county may still be adding documents from days or weeks earlier. In fact, especially during the busy summer months, counties may be two to three WEEKS behind just because of the pure volume of new real estate records.
What does this mean for your client and how does title insurance help protect him or her? This means your client may be buying a property with title issues that no one can detect. For example, if the seller has a credit card judgment recorded against him or her for $10,000.00 and that judgment falls in the gap period, we won’t be able to see it to collect it at closing. So, who pays the $10,000.00 judgment?
If the buyer purchased an owner’s title policy, he or she would make a claim and the title insurance company will ensure that the existence of the recorded lien will not prevent the buyer from selling or refinancing the property. If the buyer did not purchase a policy at closing, the buyer will have to pay off the judgment when he or she sells or refinances the property (yes, the buyer can file a lawsuit against the seller, but after a year of litigation expenses and time it likely won’t matter if the seller doesn’t have the money to pay).
Another title issue that can occur is when a seller obtains an equity line during the gap period and the closing attorney has no idea the loan even exists to pay off. The seller doesn’t tell the closing attorney about it because many people don’t appreciate that an equity line is tied to the home just like a traditional mortgage. There are many different issues that can come up in the gap period and there is absolutely nothing a closing attorney can do to protect the buyer. This is just one of the many reasons why purchasing an owner’s title insurance policy at closing is critical in the State of Georgia.
Seller Security Deeds or Other Debts Not Cancelled of Record:
The most common title issue we see that most individuals do not even think about are uncancelled mortgages, liens, and judgments. As you know, closing attorneys are required to pay a seller’s outstanding mortgage or lien in connection with a closing. After closing, that payoff is sent to the mortgage company or lien holder. Ideally, those receiving the payoff file a cancellation on the public record, letting the world know that the seller has paid off their mortgage or lien in full and there is no outstanding debt. In a perfect world, that cancellation is recorded every time. In reality . . . those cancellations do not always get filed and a mortgage actually paid off years ago will appear as an open debt, creating a title issue that must be resolved before a property can be sold.
That means a person selling their home years after buying it may be responsible for helping clear an open mortgage in a former owner’s name before they can sell their home. So how does a title insurance policy help? Owner’s title insurance policies provide coverage against a former owner’s open mortgage IF the person selling the home purchased an owner’s title policy at the time they purchased the property.
Most buyers are so excited to purchase their new home that the thought of selling their new home hasn’t even crossed their mind. However, uncancelled mortgages or liens pop up in title exams in our office almost weekly and can cause huge delays when selling a property. The good news is that most buyers purchase an owner’s title insurance policy so when this issue arises, we can quickly solve the problem. As stated above, all we have to do is obtain a copy of the owner’s title insurance policy the seller purchased at the time of closing and the uncancelled mortgage or lien will not cause a delay in the closing.
On the other hand, if a seller did not purchase an owner’s title insurance policy when they bought their home, we are (a) required to track down the law firm where a seller purchased the property, (b) confirm they have paid the debt off, (c) track down the mortgage company or lienholder that held the open debt, (d) confirm they received and processed the payoff of the debt and then, finally, (e) work with that mortgage company or lienholder to file a cancellation. Then, once the cancellation has been signed and recorded and title is updated to reflect the payoff, we can finally close.
Again, we run into this issue almost weekly and while open debts are title issues, we typically get those resolved without ever having to involve you or your client so you can focus on what you do best: Getting Properties Under Contract!
Survey Coverage:
Due to the cost and time involved in ordering a survey of a property, almost no one obtains a current survey on the property he or she is purchasing. Think about that: The buyer is purchasing a home and has no idea where the boundary lines are, whether any aspect of the improvements (i.e., the home, fences, garages or sheds, etc.) are encroaching on the neighbor’s property or whether the neighbor’s improvements are encroaching on his or her land. One of the best features of an owner’s title policy is survey coverage.
What does this mean? It means if there is nothing that would have alerted your buyer to an encroachment issue prior to closing (i.e., recorded survey showing an encroachment), a claim may be filed with the title insurance company. The most common issue I hear about after closing is a fence encroachment or outbuildings like a separate garage that is encroaching on a neighbor’s property. And even if your neighbor builds structures after the date of your policy (excluding boundary walls or fences), there would be coverage. Like any other insurance, there are liability caps and deductibles that must be paid, but if the encroachment is significant enough the owner’s title policy will provide great coverage. I think having survey coverage and the peace of mind it provides in and of itself justifies the costs of an owner’s title policy (even though it provides so much more value).
Seller Impersonation Fraud and How Title Insurance Protects A Buyer:
By now we have all heard about the closing that occurred in which the seller really wasn’t the seller. Yes, there are purchasers who have bought properties from individuals who really aren’t the sellers.
While closing attorneys do so many things to verify the identity of a seller, fraudulent sellers are getting more and more sophisticated than ever. They are manufacturing fake driver’s licenses, passports, stealing social security numbers, using fraudulent notaries to notarize closing documents and opening bank accounts in other people’s names. It’s crazy that this is happening.
The simplest thing that a buyer can do to protect him or herself in this current environment is purchasing an owner’s title insurance policy. In the event a purchaser closes on a home and learns after the fact that the seller was impersonated, the buyer can make a title insurance claim and the title insurance company will pay the buyer back any money put down to purchase the property. In addition, and if the buyer obtained a loan, the title insurance company will pay the lender back the money the purchaser borrowed.
Post-Policy Fraudulent Deeds Filed After Closing:
We have all read articles about someone whose property was fraudulently transferred out of his or her name. It is becoming more common, and like the fraudulent seller, there isn’t much a homeowner can do to prevent it from happening. If a buyer needed anything else to convince them of the importance of purchasing a title insurance policy at closing, an owner’s title insurance policy actually protects a homeowner from a fraudulent deed filed on the public record.
If a homeowner discovers that his or her property has been fraudulently transferred out of his or her name, that individual can make a title claim. The title insurance company will then hire an attorney to file a court action to have the fraudulently recorded deed invalidated. It is not a quick or inexpensive process, but having this insurance coverage should provide a buyer with incredible peace of mind.
I had a situation in which a seller was attempting to sell her home. She purchased a property that had been foreclosed on. Apparently, the person who lost the property at foreclosure was not happy about it and forged the new owner’s name on a deed and recorded it on the public record. The new homeowner had no idea this had happened until we received the title search back. Obviously, she was not able to sell her home at that time and a declaratory judgment action was filed against the original homeowner to invalidate the fraudulent deed that had been filed.
Conclusion:
Buyers are faced with so many costs and expenses during the process of buying a home. When the words “optional” appear next to the owner’s title insurance policy on the CD or ALTA, it can be tempting to waive that policy and save some money at closing. Buyers, however, must understand the importance of purchasing an owner’s title insurance policy at closing, and, more importantly, what risks they are taking if they elect not to obtain one.
*** This article refers to coverages under the Homeowner’s Policy of title insurance (more commonly known as an enhanced owner’s title policy which is the most frequently issued type of title insurance policy in our office) All covered risks would be subject to the policy conditions, exclusions, and exceptions. ***
As always, if you need help with anything at all please call me on my cell anytime (even nights and weekends and even if the closing is not in my office) at 912-484-1996 or email me at jgerber@brannenlaw.com
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