It is not too often that we run into title problems so severe that title to the property is altogether defective – meaning the owners, or so they thought, do not actually own their property. On the other hand, it is very common to come across relatively minor title defects, such as undischarged or incorrectly discharged mortgages from a prior owner. These type of defects show up often and can nearly always be fixed, usually in a fairly short time. Sometimes it may take a couple of days, a week, two weeks or a maybe a month to clear up the defect, depending on how accessible back-up documentation is and how responsive the lender is. Very often, as a seller’s attorney, we don’t find out about the title issue until a week or less before the closing after the the buyer’s attorney has let us know what came up during the title search.
In the not too distant past, buyer’s lawyers would nearly always accept an indemnification from the lawyer who had paid off the incorrectly or undischarged mortgage, based on their promise to obtain the discharge themselves, and proceed with a closing. Unfortunately, this is no longer as common a practice, as too often the indemnifying lawyer never actually does anything to clear the title matter up. As a result, it is much more common that closings are delayed for relatively minor title matters. This delay is more costly than most of us realize. The wait may very well cost you more than the cost of a title insurance policy.
When you have an owner’s title insurance policy, if there is a title defect discovered that threatens to delay or derail the sale of your home, more often than not your title insurer will agree to provide an indemnification to your buyer’s title insurer. Particularly for minor defects such as an incorrectly or undischarged (but paid) prior owner mortgage, this nearly always saves the day and keeps the closing moving forward as scheduled. Without owner’s title insurance, however, this is not an option. As a result, the sale of your home may be delayed, or worse, canceled.
In today’s market, home sale contingencies are less frequently accepted. When the sale of your home falls through and you were counting on putting the funds from the sale down on the purchase of your new house, you may find yourself unable to complete your purchase, putting your deposit in jeopardy. Assuming you are buying a new home for $300,000 – you could stand to lose a typical deposit of $15,000, never mind the costs for appraisals, home inspections and other costs that you will not recover.
Perhaps you can carry two loans for a while, so you don’t need the funds from your sale for your purchase? Or perhaps you are just selling a home and not simultaneously buying a new one? What’s the big deal? Maybe more than you think. Let’s assume you bought your house for $300,000, and you borrowed $250,000 when you purchased. You were required to purchase a loan policy for your lender for $625, but on the advice of your brother-in-law, you held off purchasing an owner’s title insurance policy for an additional $750. After all, as he frequently reminds you, your brother-in-law knows just about everything. Now, because of a minor title issue, your closing is delayed for two weeks. During that time, you need to continue paying your mortgage interest, taxes and insurance. Assuming you still owe $250,000 on your mortgage (let’s face it, we all refinanced and took out more money), your rate is around 5%, and your property taxes are $5,000 per year. What will the delay cost you? Two weeks will cost you around $650. Three weeks puts you right around $1,000. Much longer and your going to lose your buyer and have to put the house back on the market. That will put that cost up to at least $3,500, assuming you find another buyer fairly quickly.
Bottom line, don’t listen to your brother-in-law. Title insurance may do more than just give you piece of mind and help you avoid losing your home entirely. It very well may help you avoid the time, stress and considerable amount of money that even a very minor title defect can cause.