Buying a foreclosure gives you the opportunity to get your dream home at a very good price. However, bank-owned properties should be approached with caution. Although banks usually perform a series of tasks when taking possession of a piece of property, including removing previous owners or tenants from the home and clearing outstanding claims on the title, a series of defects may remain hidden.
When the bank decides to sell the property, the title search performed by title insurance professionals as part of the mortgage pre-qualification process, at the request of the buyer’s lender, may disclose certain title-related issues that lurk in the property’s past and need to be resolved before the closing.
But what happens if you have enough money to buy the house with cash and choose to forgo title insurance entirely? How risky is it to buy a foreclosure in this case? As an expert in the field of title insurance, I can tell you that buying a foreclosure can be as risky as purchasing a non-foreclosed home.
Why Should You Care about the Property Title?
When someone buys a house with a mortgage, the lender releases the title after the buyer pays off the entire balance of the loan. Meanwhile, the homeowner might take out other loans, such as a second mortgage, a construction loan for remodeling or a home equity line of credit, and use the same home as collateral. The creditors who issue all these loans have rights to the same collateral until they recover the loan amounts in full. If the homeowner fails to pay his debts, the lenders can place liens on the house, which will “cloud the title.” Since some liens may remain hidden due to errors or omissions, the homeowner can sell the house to you without settling all of his debts. If any outstanding liens are discovered when you attempt to sell the property, and you have no title insurance, you’ll need to pay off the liens out of your own pocket in order to sell the house.
Mitigating the Risks of Buying a Foreclosure
If you decide to get the help of a loan to buy a foreclosed home, the lender will require you to purchase a lender’s title insurance policy to protect his investment from unexpected claims. But as the buyer, you should also purchase an owner’s policy to protect your interest in the property.
As long as you buy an owner’s title insurance policy, the former owner can’t seize the home back, even if the property has been wrongly repossessed. In this case, you’ll get to keep the home, and the wrongly displaced homeowner will be compensated by the foreclosing lender, if he has a valid claim.
An owner’s title policy can minimize and even eliminate many other risks, ranging from fraud, forgery, undisclosed and missing heirs, gaps in chain of title and errors in recording documents to misinterpreted or improperly probated wills, invalid or illegal trusts, erroneous descriptions, deeds that don’t include all owners and defective acknowledgements.
At Guardian Title and Trust, Inc., we’ve heard all too often about people getting burned after buying a foreclosure in Florida with no title insurance. At the other end of the spectrum, getting an owner’s title insurance policy will protect you from the aforementioned title problems and homeownership issues that may arise from poor foreclosure management and documentation practices. If you’re thinking of buying a foreclosed home, we invite you to get in touch with our experienced professionals by calling (904)-992-1162 before taking the next step.