Q: I purchased land in 2003 and obtained a title insurance policy from one of the most prominent title insurance companies in the country. Additional title searches and policies were issued when I obtained a construction loan and a loan modification in 2005.
We decided to refinance our loan and the fourth title search by the bank found a lien of almost $10,000 from 1999. It appears the lien is still good. I contacted the title insurance company and they would do nothing to help us unless the lien holder files to foreclose on the property. If they file to foreclose, then they will pay the lien. They want to do the refinance with me getting a mortgage title insurance policy to protect the bank.
What should I do? Should I just pay the lien that is not my fault or try to get the title insurance company to pay it off?
A: We think you need to understand title insurance before you decide to pay off the $10,000 lien.
When you purchase real estate and obtain a loan to purchase the property, you may have to pay for two title insurance policies: one policy to protect you and one policy to protect your lender. In some parts of the country, the seller of the property you purchase may pay for the policy that protects you, but in many other parts you’ll find yourself paying for both policies.
Assuming you obtained a title insurance policy that protects you from title claims, the title company has an obligation to honor the terms of the policy. A title company will issue you an owner’s title insurance policy that will protect you from a fraudulent transfer of a deed to you, from title defects that are not disclosed to you in the policy and from various other matters that existed at the time the policy was issues. Real estate title insurance companies generally do not insure homeowners from matters that arise after the date of the issuance of the policy.
Fortunately it seems that the lien occurred well before you purchased your home. From your letter it seems that the title insurance company failed to pick up the lien and delivered to you an owner’s title insurance policy that did not disclose that lien.
So what should you do know? The first thing that you need to do is to file a claim under the policy. You need to make sure that you send the claim to the title company as required under the policy. It may not be enough that you called one of the offices that issued the policy to you. Take out the policy and make sure you file your claim in the manner and form that is required under the policy.
You want to give notice to the title company to avoid any possibility that the title company would later claim that their ability to protect you was prejudiced by your failure to give them proper notice.
Having told you all that, your next step is to understand the process of getting your home refinanced. Every time you refinance your home, the lender that gives you the loan will want a new title insurance policy. Since the title insurance policy only covers to the date of the policy, when you refinance several years later, you need to get a new policy to cover that new date.
From one date to another, new liens can arise, new tax problems can surface, people can file judgments against you, prior lenders may have filed to foreclose on the home, you may have encountered financial problems and have IRS liens filed against you, along with many other matters that could affect the title to the home.
So it’s quite common for you to have to pay for a new policy to insure your lender in this new loan. If the title company is willing to continue to insure the home and the lender, you probably don’t have much to worry about.
You do need to worry once the lien holder decides to file suit against you to enforce his or her lien on your home. It’s at that precise moment that you need the title company to come to your defense and either pay off the lien, defend the suit or settle the matter with the lien holder.
But the title company won’t want to pay off that lien holder unless it absolutely must. Frequently lien holders will fail to enforce their rights and the lien will expire in due course. The title company may be hoping that occurs. In your situation, you need to make sure you abide by the terms of your policy and probably sit tight unless the lien holder tries to enforce the lien.
For more information, you might want to take your documents along with any information you have about the lien to an attorney that has extensive knowledge of real estate law, title insurance matters and real estate liens.