To Buy a Foreclosure Home or Not to Buy a Foreclosure Home?

You may have heard the news that thousands of foreclosures around the country may be invalid because of bank paperwork problems. Multiple major lenders have frozen tens of thousands of foreclosures while paperwork is reviewed for mishandling.

This could potentially impact people who have bought a foreclosed home, want to buy a Twin Cities foreclosed home, or financially distressed homeowners who are behind no their payments, even if they have not yet received a notice of foreclosure filing.

For recent buyers of foreclosed homes, there's a chance that the bank's foreclosure processing could be found to have been improper or that the bank did not adequately document its legal title to the house. This is where title insurance saves the day. If the purchase of the home was financed, the mortgage company likely required at least a lender's policy that covers title issues. But those who did not take out an owner's policy, or bought for all cash, could find themselves defending their investment on their own.

Financially distressed homeowner who recently received notice of a foreclosure filing from the bank should consult a lawyer. Ask a lawyer to review all documents you may have received. Banks have been careless in their high-volume processing of foreclosures. Even people who aren't behind on their payments have received notices of foreclosure.

If a homeowner is behind on payments but has not received a foreclosure notice, this may be the time to demand a loan modification, maybe even a substantial principal reduction, from your loan servicer. This new foreclosure mess might convince banks to become real partners in devising solutions for distressed borrowers.

A homeowner with title insurance shouldn't worry if the previous owner stakes a claim to the home. Even if the claim is successful, the result would most certainly end up with the title company settling with the evicted homeowner. The new buyer would not end up homeless as a result of a fraudulent foreclosure.

The situation is different for people who bought their homes with cash and didn't buy title insurance. The issue of who owns the title to the home could be uncertain.

What about trying to buy a foreclosure home right now?

Rick Sharga, a RealtyTrac senior vice president, said buyers who are making a foreclosure purchase from a bank shouldn't be concerned. He says they should just double-check to make sure it's possible to get title insurance. If the title insurance company won't sell a policy on a property, you probably shouldn't buy it, Stopa says.

The cost of title insurance varies by state and circumstance but is often roughly 0.5% of the mortgage — in the neighborhood of $1,000 for a $200,000 loan.