Can Title Insurance Save Your Home?

by Dan Krell © 2008
Google+

Would you sign a hold harmless letter if you decided not to purchase an owner’s title insurance policy? Prior to her recent home purchase, a local home buyer was asked to sign an affidavit holding the attorney, the real estate brokers, their agents and employees harmless from any future claims arising from any title problems. She declined purchasing an owner’s title insurance policy. However, once the attorney explained the potential problems that may occur and how the title insurance could protect her interests, she decided to purchase the title insurance.

Believe it or not, the actual number of paid title insurance claims is relatively low (about four to five percent). Fortunately, many title problems are resolved without a claim, while some problems are resolved in an effort to not pay a claim. According to a 2005 survey conducted by the American Land Title Association (ALTA is the national trade association of the abstract and title insurance industry), about one third of all residential transactions have title problems; title issues in the previous 2000 survey were reported at being 25% (ALTA.org).

Although title problems do occur, most are resolved. According to ALTA, the most frequent title problems that occur (and need to be resolved) include unreleased and unpaid liens (including first and second mortgages, unpaid child support, tax liens, and other judgments). Other frequent title problems that occur include unreleased mortgage or deed of trust assignments and recording errors (legal documents having the wrong names, addresses, and legal descriptions).

The reason for the increase of title issues is twofold. The recent real estate market expansion saw a significant rise in the number of real estate closings, which gave rise to the opportunity to find additional title blemishes. Additionally, the fast paced environment of those years gave rise to the opportunity for mistakes to be made by overworked and/or inexperienced title agents and county employees.

Title insurance critics say that purchasing an owner’s title insurance policy is an unneeded closing expense placed on the home buyer for the title agent’s benefit (who makes a commission). Some passionate critics describe title insurance as a “scam” or “rip-off” because most title problems are easily resolved.

The few title problems that cannot easily be resolved can be catastrophic, as was the recent case first reported by the Columbus Dispatch on May 31, 2008 (Dispatch.com). The Ohio family’s home is being foreclosed on because of a typo that appeared on the previous owner’s line of credit. The line of credit was filed under the misspelled name of the previous owner.

The present owner reportedly felt it unnecessary to purchase an owner’s title insurance policy because the title search showed no problems. Unfortunately, the line of credit went unnoticed and the previous owner did not pay off the line of credit (reportedly being $150,000) at closing. Needless to say, the present owner was shocked to find out the previous owner’s mortgage company decided to foreclose on his home after years of non-payment. Could the foreclosure have been averted if the owner had title insurance?

State laws governing title insurance vary; purchasing owner’s title insurance is optional in many states. If you are planning to purchase a home, consult an attorney about title insurance.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of July 21, 2008. Copyright © 2008 Dan Krell.