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Real Estate Corner: Why you should buy your own title insurance
When buying real estate there are many decisions that buyers have to make. Many such decisions involve areas of expertise that are new to buyers, technical in nature, and therefore present unique opportunities for uninformed decisions.
One unique such area involves title insurance. The field of title insurance is highly technical so there are many statements contained herein that are general and may not be relied upon or taken literally, or as all encompassing.
This article is intended to be educational only and introduce buyers of real estate to an important distinction between owner's and lender's title insurance coverage. You should consult with an attorney prior to embarking upon any specific course of action.
In general, title insurance pays an insured when the title is defective. By "title," I am referring to the documents which make up the chain of ownership to the property — typically deeds from one owner to the next.
Any first mortgage made by a federally insured lender or destined to be sold on the secondary market must be insured with a lender's title insurance policy. Borrowers typically pay for this lender's policy as a cost of getting the loan.
Because the borrower typically pays for the lender's title insurance policy, many borrowers believe that it is "their policy." However, a lender's title insurance policy only benefits the "insured" — in this case the lender.
In order to get the benefit of title insurance, a borrower/buyer must also purchase an "owner's" policy of title insurance. Let me illustrate this, using the example of a typical home purchase.
Ms. Buyer decides to buy a home on Blodgett Street in Manchester. She executes a contract to purchase the home from Mr. Seller.
She then goes to ABC Mortgage Co. and applies for a mortgage. ABC Mortgage hires attorney Smith to review the title, issue a lender's title insurance policy for the benefit of ABC Mortgage, and to conduct the closing. The title insurance policy that ABC Mortgage requires is a lender's policy.
As a condition of the mortgage loan, ABC requires that Ms. Buyer pay for the title policy. The title policy for ABC Mortgage will pay ABC Mortgage if Ms. Buyer does not repay the loan and ABC encounters problems with the title when it forecloses on the mortgage.
To illustrate how this works, let's assume that there is an old mortgage on the title — from Mr. Seller to Bank B. For whatever reason, that old mortgage was not discovered when attorney Smith examined the title documents.
As a result, it was not paid off.
If Ms. Buyer fails to pay the mortgage to ABC and ABC forecloses, the title policy will cover ABC for its loss if it has to pay off Bank B.
The policy required by ABC Mortgage does not cover Ms. Buyer's interest in the property because she is not the insured. In order to have title insurance coverage, she would need to purchase an owner's policy of title insurance, separate and apart from the lender's policy that ABC Mortgage requires.
Generally speaking, an owner's title insurance policy pays an owner if he or she suffers a loss directly caused by some defect in the title.
Let's go back to our example of Ms. Buyer above. For discussion purposes, assume that there is a mortgage from Mr. Seller to Bank B, and further assume that Ms. Buyer properly repays her loan to ABC Mortgage.
However, Bank B is still owed money and still holds a mortgage on the Blodgett Street property.
One avenue of recourse that Bank B has is to demand payment from Ms. Buyer, barring which it will foreclose its mortgage. The effect of such a demand on Ms. Buyer is drastic — she must either pay Bank B, or risk losing the property.
If Ms. Buyer does not have her own title insurance policy, the policy for ABC Mortgage will not protect her for two reasons.
First, she is not the insured under the policy. Second, the lender's policy only pays a loss — and the lender only suffers a loss upon completing its foreclosure.
By the time foreclosure is completed, Ms. Buyer would already be out of a home. However, if she has an owner's title insurance policy, the title insurance carrier would be obligated to step in and defend Ms. Buyer and possibly pay Bank B to clear the title.
When Bank B demands payment from Ms. Buyer, she should immediately file a claim against her title insurance policy and demand her coverage.
Bottom line — if you are purchasing real estate consider purchasing your own title insurance policy.
Carol E. Willoughby is vice president and New Hampshire state counsel of First American Title Insurance Co.
This information has been provided by the Mortgage Bankers and Brokers Association of New Hampshire in conjunction with the New Hampshire Union Leader. Any questions about the content should be directed to the MBBA-NH at 6 Garvins Falls Road, Suite 106, Concord, 03301, e-mail at email@example.com, website mbba-nh.org.
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