What happens if a title problem is found after I buy a home?
In the usual case, title problems are rare. However, because title problems can arise, as a condition of obtaining a mortgage your lender will require that you buy title insurance, protection in case a title snag is found.
If a problem shows up, the title insurance company will step in to defend your interests, including all legal costs.
If a title problem cannot be resolved, the title insurance company will pay off the mortgage if you have “lender’s” coverage. You will lose whatever equity you have in the property. In other words, if you bought a home for $100,000 and have a $90,000 mortgage, lender’s coverage will pay off the $90,000 loan. However, it is possible that all of your equity, $10,000 in this example, could be lost.
With “owner’s” coverage, the situation is different.
In this case, if you have a title problem that cannot be resolved, the title insurance company will pay off the mortgage and at least the value of your equity. For example, if you buy a home for $100,000, have a $10,000 down payment and a $90,000 loan, title insurance will pay off the $90,000 and pay back your $10,000 investment.
Some owner’s policies have an inflation clause so they will also pay any equity which has resulted from appreciation (higher market value) while you’ve owned the property. In this case, imagine that you bought a home for $100,000, paid in $10,000, had a $90,000 mortgage. Imagine also that when the problem was found the home was worth $125,000.
With owner’s coverage that includes inflation protection, if a title problem could not be resolved, the title insurance company would pay off the $90,000 mortgage and pay you $35,000 ($90,000 plus $35,000 = $125,000).
For details and options, speak with your closing agent — before settlement so you can consider such alternative coverage as may be available.
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