Purchasers After a Foreclosure Should Ask for the Homeowner’s Title Policy

Reposting and unfortunately all too relevant post from Dwight Bickel, Corporate Counsel for Ranier Title.

Did you know that some title companies do not offer the ALTA Homeowner’s Policy of Title Insurance after a foreclosure sale?  Purchasers who want the extra protection of that policy should shop around.  Other title companies are willing to provide that protection.

A purchaser after a foreclosure needs the extra protection of the Homeowner’s Policy of title insurance even more than usual.  For the same reasons that some title companies are not willing to issue it! 

There are many possible title problems lurking after a foreclosure.  Sometimes junior liens do not receive proper notice, so they remain enforceable against the property.  Sometimes there are errors in foreclosure procedures clouding the lender’s ownership.  The foreclosing mortgage companies and the foreclosure Trustees are not obligated to protect the purchaser against those risks. 

That is one reason I recommend to ask a different title company to search the title after a foreclosure.  A new title company is more likely to reveal problems due to that foreclosure. 

Purchasers do not receive normal deed warranties following a foreclosure or involuntary sale.  The seller will limit its liability for title problems by requiring the transfer by a quitclaim, “bargain and sale,” or “special warranty” deed.  Those deed forms do not promise the sale was proper or the property is clear of other liens.  Those deed forms do not protect the purchaser against possible boundary problems or against unrecorded labor or material liens due to recent work. 

The purchaser relies entirely on the protection of the new title insurance policy.  The standard coverage title policy is inadequate to protect against all those risks.

Every title company in Washington could issue a Homeowner’s Policy for transactions that are completed homes.  The form is available, but some companies refuse to issue it.  That policy form provides substantial protection against boundary problems, unrecorded lien rights, and a long list of risks related to the compliance of the home with easements, covenants, zoning and other matters.  The standard coverage policy that the seller will provide will not provide that protection.

The purchaser who understands these risks is likely to request the extra protection of the Homeowner’s Policy of title insurance.  An offer for property owned by the lender after foreclosure should designate that policy and state that the purchaser will pay the extra premium.  The extra cost to the purchaser for a $350,000 home would be $176.  

If the particular title company will not issue the Homeowner’s Policy, the purchaser is entitled to change to a different title company that is willing to provide the extra coverage.  Most rate schedules say there is no cancellation fee when the purchaser chooses a different title company that offers coverage the first company declines.

If the purchaser will pay the extra for the Homeowner’s Policy of title insurance and is obtaining purchase financing from a “federally-related mortgage lender,” Federal RESPA law says the purchaser has the right to designate a title insurance company that will provide that policy form. 

The HUD web site contains this section of the Real Estate Settlement Procedures Act of the United States Code:  

Sec. 2608. Title companies; liability of seller

(a) No seller of property that will be purchased with the assistance
of a federally related mortgage loan shall require directly or
indirectly, as a condition to selling the property, that title insurance
covering the property be purchased by the buyer from any particular
title company.

(b) Any seller who violates the provisions of subsection (a) of this
section shall be liable to the buyer in an amount equal to three times
all charges made for such title insurance.

You also should know that the seller’s consent is not required.  The title insurance is entirely for the benefit of the purchaser.  The purchaser can always request an upgrade to the Homeowner’s Policy at the purchaser’s expense by an instruction to the escrow company.

When you write the offer to purchase an REO property, first obtain the Addendum that particular lender will require.  That will streamline your offer and give a better chance of approval.  On the Addendum, where it specifies the title policy, cross out where it says “standard coverage” title insurance policy, and writeHomeowner’s.”  The seller will not agree to pay, so I recommend buyer should also write, “The buyer will pay the extra premium.

Your offer will have a better chance of acceptance with these changes if you do not also change their designated title company.  Instead, you should write, “If that policy is not offered, buyer may designate a different title company.

If you are the selling agent for a purchaser seeking residential property after a foreclosure, inform the purchaser about these risks and ask if they want the extra protection of the Homeowner’s Title Policy.

For more explanation, you may want to read my prior blog posts:

The opinions expressed in this article are entirely my own (or Dwight’s, in this re-blogged post) and do not necessarily represent the views of Guild Mortgage Company.

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About Chris Butaud

Mortgage Originator with a CPA & a Masters in Taxation. This background has proved invaluable to my clients in the ever-changing and complex world of mortgage origination.
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