People who must secure mortgages to purchase real property are subject to numerous restrictions. Lenders and government loan programs impose certain restrictions on the properties themselves. They may also make certain closing demands, such as requirements for inspections, appraisals and title insurance.
Buyers who can come to the table with a cash offer do not need to worry about the hassle of working with a mortgage lender. They can acquire any property that they can afford without worrying about protecting an organization’s finances. Of course, cash buyers generally still want to protect their own resources. While it may seem like a smart move to decline title insurance coverage when purchasing real property with cash, doing so can be a mistake.
Title claims are rare but potentially devastating
Mortgage companies and banks require title insurance to protect their investment in a real estate transaction. If another party comes forward and asserts that they have an ownership interest in the property, the lender could be at risk of losing hundreds of thousands of dollars.
If the buyer cannot successfully defend against the title claim, the party making the claim acquires the collateral property. The buyer is likely to cease making mortgage payments at that point, and the lender cannot foreclose on a property that the buyer does not legally own. Title insurance protects lenders from these devastating scenarios.
Buyer’s policies extend similar protection to those purchasing real property with their own resources. A buyer’s policy can cover the cost of legal representation during the title dispute. If the party making the title claim prevails in court, then the buyer’s policy can reimburse the buyer for the amount that they invested in the property.
Cash buyers can potentially recoup what they paid for the property and the value of any improvements they made to the property since taking possession. Title insurance is costly in part because claims are often six figures or more. Although the vast majority of homeowners never face title claims, those who do are at risk of absolute financial devastation and loss of the property that they purchased.
Learning more about the various closing costs associated with real estate transactions can help cash buyers and others make the best choices for their own protection. Title insurance may be costly, but it provides long-term peace of mind for those who have invested hundreds of thousands of dollars in real property.