This article is dedicated to preventing two potentially painful real estate "pitfalls" for our military families who are buying and/or selling homes. The good news is that these pitfall don't happen often. The better news is that they are remarkably simple to prevent! The bad news? If they do happen, they can be very expensive, not to mention inconvenient.
First let's address title insurance. We'll leave the technical definitions to the real estate attorneys, but every military home buyer should invest in "owner's" title insurance. In a nut shell, title insurance is designed to insure the lender and the buyer against a defective property title at the "time of settlement." Otherwise stated, a seller must provide clear title, or one that does not have a lien against the property preventing its sale. Liens could be for overdue taxes, homeowner's association compliance, work performed on the property that was not paid, etc. Many times family deaths or divorces can cloud titles. Although the settlement company should complete all of the title research prior to settlement, this unfortunately does not always guarantee clear title.
At settlement, the lender will require that you purchase "lender's" title insurance to protect their investment, specifically the money they lend you to purchase the home. At settlement, the buyer has the option to purchase owner's title insurance, usually at a reduced rate. In many cases, the total title insurance bill represents one of the largest parts of total settlement costs, but just like auto or home hazard insurance, it will be worth every dime if you ever need it. By the way, if you refinance, the new lender will also require you to purchase the title insurance for them, but your "owner's" title insurance policy should remain in effect for as long as you own the home -- and beyond.
Why would you ever need title insurance after you sell the home? Here is pitfall No.1:
- Even after you sell the home, maybe 20 years after, a defective title may be discovered that goes back for decade -- someone will have to pay to clear the title. We don't want that someone to be you! To prevent this unlikely, but very painful experience, VR SAM recommends that you keep one accessible file of all title insurances on every home you ever purchase -- forever. Since the title insurance policy is generally written after settlement, make sure you receive it in the mail within 60 days after settlement. In a few instances, the underwriting company has failed to send it. And it is always possible for it to be lost in the mail, especially with address changes.
Here's pitfall No.2:
- We would like to address the "release of lien" that should occur, and be recorded, when you refinance your home. For instance, if your present lender is Company A and you refinance with Company B to take advantage of better rates, Company B should make the full mortgage payoff to Company A, then Company A should release the lien against your home, and record the release of the lien. They should then send you a confirmation letter that the lien has been released and recorded. Like title insurance, this can take up to 60 days (or more). It is critical that you follow up and ensure you have this document every time you refinance your home.
Why is this important? When you decide to sell your home, you will likely contractually agree to provide "good and clear' title to the home on the settlement date. Typically, settlement companies do not complete the title research until a few days before settlement. Let's consider a worst case scenario. Company A never sent you the "release of lien" document and subsequently was bought out by another company, or simply went out of business. This happens! Now one day before settlement, you find out that the release was never recorded, and the settlement company cannot clear the title.
As the seller, you may be in default and the buyer can probably "walk" with their earnest money. Or worst yet, you may be subject to litigation. Can it get worse? You bet. For example, if you put $10,000 down on a contract to buy another home and need the proceeds from your current home sale to settle. You could be in default again, lose the $10,000 -- and perhaps be subject to even more litigation. The best case of course is that you drop everything and scramble to get it resolved. Who needs that stress on top of a PCS?
Of course the easy solution is to follow up on the "release" document and again, maintain an accessible file for all such releases.
In case we scared you, we should reiterate that these do not happen often. However, the National Association of Realtors has reported an increase in the number of "release" scenarios over the past few years as a large number of homeowners refinanced to take advantage of the historically low interest rates. The pure volume of refinances has increased the error rate.
Caveat: Laws and contractual traditions pertaining to the above discussion may vary from state to state. If faced with these situations, VR SAM strongly recommends you immediately consult a local real estate attorney for advice. As always, VR SAM invites your comments and questions. We hope you will join us for the next to monthly articles when we attempt to "demystify" the settlement document, the HUD 1.