Buying, Selling, and Mortgaging Your Home -- Part 1

You have probably heard that "a man's house is his castle." Many people invest more money in their homes than in all of their other assets. This article begins a two-part series on basic information and precautions that ordinary people should know about buying and selling houses.

Real Estate Title Protection

A real estate buyer usually needs to acquire full property ownership. Likewise, the buyer's bank needs to know that it can get its money back by forcing a real estate foreclosure sale if the buyer defaults on the loan. Real estate values are usually too high to trust the seller's honesty or assume that the seller acquired good title. If the seller or a prior seller fraudulently or mistakenly sold the real estate to someone other than the current buyer (yes, we have seen such mistakes), both the buyer and the buyer's bank would lose a title dispute with the true property owner. The real estate title business evolved to solve that problem.

Abstract

If you bought home more than 25 years ago, you probably received an abstract of title (normally just called an "abstract"). An abstract contains summaries of a property's ownership changes, often from the state's earliest history in a book bound at the top. An abstractor searched the county real estate records before and after each sale or mortgage transaction and added new abstract pages with summaries of any mortgages, deeds, judgments, or other matters that would affect the real estate ownership.

Title Opinion

Abstracts do not interpret the documents that they summarize, so a banker or real estate purchaser would normally hire a lawyer to read an abstract and issue a written title opinion. The title opinion would identify ownership problems (such as federal tax liens or unexplained title gaps after a prior owner's death) and suggest title corrections. The seller would then fix the title problems, the buyer and seller would meet at the buyer's bank or the title company office to close the sale, the seller would sign and deliver a new deed to the buyer, the buyer would sign and deliver a mortgage to the bank, and the title company would record the deed and mortgage. The title company would then search real estate title again and update the abstract to verify the proper recordation of the new deed and mortgage in the county recorder's office. Finally, the attorney would read the updated abstract and write a final title opinion confirming that the buyer acquired good title and the bank acquired an enforceable mortgage.

Title Insurance

Title insurance has almost completely replaced the abstract and title opinion system. A title company still conducts a preliminary and follow-up title search, but now it issues a "commitment to issue title insurance" as a replacement for an updated abstract and an attorney's preliminary title opinion. The commitment identifies title defects and requires title solutions as conditions that the parties must fulfill before the insurance company will issue a title insurance policy. The same real estate transaction closing procedures apply as before, but now the closing agent collects a title insurance premium from parties (usually, the seller) at closing, and then updates the title search and issues a title insurance policy to the buyer after closing.

Title Insurance in Action

Consider this example of how title insurance works. Imagine a title searcher showing up at the courthouse too sleepy after a late-night party to notice a recorded $50,000 mortgage against a $150,000 home during the preliminary title search. If the new property owner would need a home equity loan a few years later, an alert title searcher would discover the overlooked mortgage and the title company would exclude coverage of that old mortgage in a new title insurance commitment. The buyer would then file a title insurance claim with the old title insurance company and the old title insurance company would pay off the old mortgage to clear the title for the new home equity loan.

Stay Tuned

We will conclude this two-part series next week with more real estate investment protection tips.

Jeff R. Hawkins and Jennifer J. Hawkins are Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers and Jeff is a Fellow of the American College of Trust and Estate Counsel. Both lawyers are admitted to practice law in Indiana, and Jeff Hawkins is admitted to practice law in Illinois. Jeff is also a registered civil mediator and the 2014-15 President of the Indiana State Bar Association.