Home-Buying Snafu: Lender Backs Out, Now What?

Q: I recently purchased a house and a week after the closing I learned that the lender backed out of the deal. Now it appears that the title company had already paid off the seller and holds the deed to my house and is requesting monthly payments.

My concern is that I have no written contract with this title company. Can it can go ahead and sell the house at any point it wants? What can I do about this and who is responsible since there was already a closing and the paperwork was signed?

A: In light of the recent issues with lenders, your question is timely.

The good news is that you need to worry only about one major issue: You need to make sure that the deed from your seller to you was recorded and that title to the home is in your name.

Second, you should have obtained title insurance in the purchase of your home. If you purchased title insurance, the title company has an obligation to insure that you have obtained good title from the seller upon the closing of the home.

With your unfortunate set of circumstances, it seems that the title company closed the transaction, but at your closing, your lender probably closed its doors and failed to properly fund the closing. The title company cut checks to the seller and the seller’s lender along with everybody else at the closing, but didn’t receive the money.

The loan between you and your now-defunct lender is probably invalid. Your lender never funded on the loan, and the mortgage to that lender would probably not be good.

The title or escrow company — which acted as the closing agent for your purchase — is now saying to you that it expects you to honor your obligation under your loan. Except that rather than pay the now-defunct lender, you need to pay the title company.
Sam Tamkin Sam Tamkin

If all of this information is correct, you’ll need additional documentation from the title company to make sure that the title to the home is properly in your name, and that any funds that were to be sent on your behalf for real estate taxes and insurance are still with the title company. You also need some sort of agreement with the title company to honor the terms of your loan.

You should sit down with a real estate attorney to make sure that all the information you’re being given is accurate and correct, and that you fully understand the situation. Don’t sign any documents with the title company unless you have an attorney review them first.

At some future date, you can refinance the property with another mortgage lender. The title company would then release any claim it has against your property (just as any mortgage lender would) and you can proceed with a new lender.

If interest rates have fallen since you purchased the property and the value of your home has remained stable, you (or your attorney) can ask the title company if it is willing to pay the out-of-pocket expenses you’ll incur in refinancing the mortgage. If it is willing to do that (and it’s likely in their best interests to get this loan off their books), you can move on and have your loan placed with a real mortgage company.

If the title company has not recorded your deed and you obtained title insurance, you are correct to be worried. You need to have that deed recorded to reflect that title is now in your name. The title company should not hold your title hostage for a mortgage lender problem that you did not cause.

One option is for the title company to file an equitable mortgage against your property. That is, it may file paperwork on the property claiming that it has a mortgage on your home because the title company gave you the money to buy the home (it fronted the money for the lender, who failed to reimburse the title company). Having an equitable mortgage against your property allows the title company to be reassured that you won’t go off and sell the home and pocket all the money without repaying it the money it put up at closing.

We’ve heard from a number of buyers recently who in your shoes. The results aren’t pretty.

Some title companies have made demands of the buyers to refinance the loans. As a closing agent, the title company was the company that took the risk to make sure that the title properly transferred from the seller to the buyer. The title company shouldn’t now make that demand of the buyer unless it places the buyer in the same situation the buyer would have been in had the loan closed properly.

The truth is that your title company should not have closed on your transaction if it didn’t have the funds in its hands to distribute to the seller and other parties. What probably happened is that your title company received a check from the mortgage company and that check bounced.

In some ways, you’re lucky. If the title company had known that the check wasn’t going to be honored, it could have cancelled the closing and you would have been looking for a new lender, without a house and with an angry seller looking to sue you for failing to close on the purchase of the home.