Cautionary tale on why you need to protect your home with title insurance
Q: My neighbor can’t transfer the title of her house to her children because of an old outstanding mortgage of $80,000 on her family home. The mortgage was with a private individual who was never taken off from the previous sale of that particular house more than 30 years ago. The lawyers are deceased, and there is no one who can help her.
What does she need to do? What would the outstanding mortgage amount be on $80,000 plus the interest on the money all these years? Now that private person wants her to pay him for all these years!
A: We need to make some assumptions to answer your question. The first assumption is that your neighbor purchased her home and that mortgage was on the title to her home at that time. Our second assumption is that your neighbor purchased her home 30 years ago and that no one made a claim on that mortgage during those 30 years. (If we don’t make these assumptions, there are way too many variables for us to answer the question.)
And now, a question: When your neighbor purchased her home, did she obtain title insurance on the purchase? If she did, she should search for the title insurance policy.
If she purchased the home without knowing about the old mortgage debt and she has her owner’s title insurance policy that does not show that debt, she would be able to file a claim with that title insurance company because the company failed to find the debt when it researched the title to the property. The company would be obligated to defend your neighbor against the claim for $80,000.
We’re big believers that when you buy a home, you should obtain not only a title insurance policy that protects the lender on that purchase but an owner’s policy, as well. And this question you posed is exactly why: There are all sorts of things that happen when you buy property. Until blockchain technology takes over the industry, if it ever does, mistakes and missed information from decades earlier may surface and cause harm to the current owner.
It’s hard to believe that your neighbor would purchase the home knowing that there was an $80,000 debt owing on the home — unless your neighbor bought the home and assumed the loan. In other words, she would take over the loan and pay back the money with interest.
On the other hand, if she can't locate the title insurance policy or for some reason didn't get one when she purchased her home, she'll probably have to hire an attorney to defend her. Most states have statutes that provide for old debts that are not collected to become extinguished if the creditor takes no action on that debt for a certain period of time.
In your neighbor’s situation, it seems that out of the blue someone has claimed a debt that predates her ownership of the home — a debt that is from 30-plus years ago. It’s likely that there is a state law on the books that says that a lender must file suit or make a claim to collect on a debt owed within a certain period of time. In your neighbor’s situation, we think the lender should have showed up 30 years ago to collect on the debt.
Frankly, the loan terms may have been for a 30-year loan, but the loan probably had installment payments owed over the past 30 years that were never collected. Lenders can’t sit back and wait for 30 years to collect an old debt. There are laws requiring lenders and creditors to collect debts as they are owed. Not doing anything for 30 years may have well made this debt (if indeed your neighbor assumed the loan) uncollectible.
For these reasons, your neighbor will need to talk to an attorney who specializes in real estate to get more information to determine whether that old debt is stale and can’t be collected upon. If it is uncollectible, then your neighbor can work with a title company to convey title to her kids and ascertain that they can get good title to the home.
(As an aside, we don’t think that your neighbor should just convey title to her children in order to escape estate taxes — if that’s what she’s doing. She’ll do better by putting the property into a trust and allowing them to inherit it. For details, see this column we recently wrote. If you want to understand more about how property transfers to your heirs, see this column.)