Claim with title insurance company comes up when an unknown prior lien is found. Watch our video on what title insurance is and what it covers below.

Q: I am the third owner of a property. A fraud investigator from a bank recently called to ask how I came to own my home. I gave him the explanation. He then proceeded to tell me that the bank has a lien on my property from the first owner.

The title search did not reveal this when I bought the house. The first owners of the house apparently took out an $80,000 credit line on the house four weeks before they closed on the sale of the property to the second owner. Because of the dates, I am guessing the credit line was taken out after they had a sales contract on the house.

Is the original owner guilty of fraud? Can the bank have a legal lien on my property if the loan it provided was based on fraud? The fraud investigator is telling me that I will need to file a claim with the title insurance company. My contention is that the bank should never have approved this loan and is going after the wrong party.

A: While you might wish that you were not involved in this situation, the fraud investigator from the bank is correct – you will likely need to give your title insurance company a call. We just hope you purchased an owner’s title insurance policy upon the purchase of your home. If that title insurance policy did not show the lien from the bank, the title company should be on the hook for the loss.

You need to file a claim with your title insurance company as quickly as possible – don’t walk, run to the title company office. With the large number of mortgage fraud cases these days, the claims departments for title companies are swamped. Make sure you promptly file a claim to have the title company defend you against the bank. In the end, if the claim is valid, the title company will have to pay off the amount owed to the bank.

This is precisely why you need and should get title insurance when you purchase a home.

On the issues you suspect are fraud, there’s no way for you to know whether there was any real fraud involved when the prior owner took out the loan. While it is possible that the prior owner knew the closing agent would not know about the loan, it’s also possible that the prior closing agent saw the loan, but failed to pay it off. These days there are quite a number of reasons you could end up in this kind of situation.

However, when an owner of a piece of property is given money, signs a promissory note for that debt and the lender places a mortgage or deed of trust against the property, the loan is generally considered to be valid unless proven otherwise.

If the lender actually did give the money to that prior owner, you are correct that the prior owner owes the money. The title company upon paying the claim can then go after that prior owner for the amount paid out in the claim.

Title companies have sellers sign a number of documents at settlement. In some states, title searches of the document registries often lag in time and that lag leaves a gap of information that is an unknown for the title company and buyer. In this situation, the title company obtains a document from the seller representing to the title company that the seller has not taken any actions during the last thirty or sixty days that would affect the title to the property.

In your case, that prior owner took out a mortgage during that gap period. And if that owner failed to disclose the mortgage if it did not show up on the title report or the information wasn’t available from the public documents, that prior owner would be on the hook to that title company.
Interestingly, if there are several sales that occurred from the time of that first sale that caused the problem, your title company might have an issue, but you should not have a problem and your policy should protect you against this claim.

You should know that your title insurance policy only protects you up to the purchase price for the title insurance policy. If the prior lien was for $80,000 and you purchased the home for $40,000 and have a title insurance policy for $40,000, the title company’s maximum liability under the policy will be $40,000. If you purchased an owner’s policy, your equity would be protected as well.

Write to us and tell us how responsive the title company was to your title insurance claim. If you’re not getting the response or service you desire, you might want to hire an attorney that has experience in real estate law and title claims to help you.