Why Real Estate Title Insurance Should Be Obtained In Every Transaction
Written by: Alan Nochumson
In any real estate purchase, title insurance should be obtained. When land transfers owners, the new property owner can be responsible for pre-existing mortgages, unpaid property taxes, personal judgments against former property owners and even unpaid utility bills. By purchasing title insurance, the new property owner can ensure that they own the property free and clear from these potential liens and encumbrances. Simply stated, title insurance protects buyers from any issues with the title of the property, making the transaction less risky.
The Benefits of Title Insurance
1. Circumvent Mortgage Responsibilities
Obtaining title insurance can help you protect your investment in cases where the previous property owner took out a mortgage to buy the property.
Take this as an illustrative example. In a real estate transaction, the current property owner probably took out a mortgage to purchase the property in the first place. Assume the current property owner’s mortgage is $200,000 and agrees to sell the property for $300,000. If the mortgage is not paid in full when the property is transferred, that mortgage will remain as a lien against the property and does affect how much the new property owner will receive after they sell the property in the future.
Why is this the case? Assume the new property owner sells the property for $300,000, the same amount they purchased the property for. After paying the $200,000 mortgage lien from the sale proceeds, the new property owner will only be left with $100,000 of their $300,000 initial investment. This could be a rather costly mistake.
2. Protect Yourself from Unpaid Property Taxes
Title insurance can also help protect you from a previous property owner’s unpaid property taxes. Take the previous example and apply it to a case with unpaid property taxes. Say, for instance, the current property owner does not pay the property taxes during all of his years of ownership. The unpaid amount serves as a lien against the property, and that property tax lien will only be removed when that amount is paid in full.
3. Avoid Complications with Personal Judgments
Personal judgments against former property owners also may have a negative effect on the state of title to the property. In Pennsylvania, a personal judgment attaches to all real estate that an individual owns at the time the judgment is entered, meaning you could be buying a property with a judgment lien. In a future sale of the property, the sale proceeds will first be applied to satisfy that judgment.
4. Steer Clear of Utility Responsibility
Depending upon the jurisdiction, unpaid utility bills also attach to a property. At closing, these bills must be paid in full. As an initial step, the new property owner must first find out which utilities may attach as a lien, which can be tricky as each county is different. Then, the new property owner must determine if any such bills remain unpaid, otherwise the new property owner will be literally and figuratively footing the bill in the future.
5. Protect Your Purchase
As a new property owner, you should also purchase title insurance to make sure that your transaction is valid. In this day and age, identity theft is prevalent. As a new property owner, you must make sure that the current property owner is the actual person on the deed to the property. If the current property owner is not that person, the new property owner will be purchasing that person’s interest in the property, which is nothing.
However, there are some cases that are less fraudulent but rather a result of neglect. A lot of times, the person selling the property does not even remember how they came to own the property. They may own the property through a corporate entity or a married couple thinks they are both the owners of the property when they are not. This is a common occurrence when one spouse purchases the property before marriage and the other spouse moves into the property after marriage. The couple equally pays for all the property expenses during the marriage, so naturally they assume they equally own the property, which they do not.
When it comes to making smart real estate decisions, obtaining title insurance makes plain sense. While many of these situations may not come to pass, it is more advantageous to have this type of insurance so you are prepared for the worst case scenarios.