Is it Safe to Buy a Foreclosed Home?
A number of issues are involved with buying foreclosed homes, not the least of which is a clear title. When people think of taking on a home associated with a troubled mortgage or related default, many worry about the inside of the home or its systems being damaged by the previous owner’s anger. However, while such damage where it occurs can be frustrating and a financial problem, a disputed title can be much worse.
How Title Problems Occur
When a home is first built and sold, the legal title to the property and the structure on it transferred to the owner when the construction company gets paid. For most, this payment happens via a home loan or mortgage. Within the paperwork of the mortgage, the lender retains a right to seize the home as collateral should the loan go into default and not be paid on time. The process of seizing the collateral is known as foreclosure.
The problem, however, occurs when foreclosure is initiated but the repossession is not processed correctly. This essentially leaves the title still in the hands of the original owner. However, a new buyer comes in, buys the home on a bargain, and thinks he now has title. When the original owner gets wind, he can assert ownership still because he never lost it. The whole situation turns into a very bad mess with money lost.
The Solution for Foreclosed Homes
Foreclosed homes that are sold with title insurance in the escrow process resolve the unclear title issue above. The title insurance makes sure that if the title was unclear, the new buyer will keep the house he bought. The original owner can recover monetary damages from the lender for not clearing title before sale, but he can’t get the home back, especially at the expense of the new buyer. As a result, at a minimum any buyer of a foreclosed home needs to make sure title insurance is provided. Buying without this protection is about as risky as placing the same amount of money on a roulette table in Las Vegas.
Foreclosed homes will have their inherent issues such as potential cosmetic damage and items that need renovations. However, no buyer wants to deal with a title that needs fixing. The legal title to the home should always be clear or insured before any money is put down. Yes, it involves a fee for the insurance to be included, but it's a small amount of money that is well spent in the purchase of a foreclosed home.
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