The process of buying a home or other piece of property through a short sale is a bit lengthier and more complicated than buying real estate that doesn't have an existing mortgage that won't be fully paid off. However, once you cut through all of the bank's requirements, you're still buying a house. The only thing you actually need to buy the house is to have enough money to make the current owner agree to sell it to you. Anything else that you have is technically optional, although title insurance can be a good thing to have.
The Short Sale Process
The process of buying a short sale property is roughly similar to purchasing any other house, but with one additional step. You still write an offer and negotiate with the seller. You should also have the opportunity to inspect the property and make sure it's what you expect. As a short sale buyer, you can get a mortgage and work with your own lender as well. The key difference is that your offer, once accepted by the seller, has to go to the seller's lender to get approval. If that lender doesn't approve, it won't consider the loan paid off when you buy.
What Title Insurance Covers
Title insurance protects your ownership in the property. When you buy a policy, the insurer scrutinizes the property's history to make sure the seller has the right to sell it and the person who sold it to the seller had the right to sell it -- and so on. If something goes wrong -- like a lender from 80 years ago claiming it had never been paid off or a long-lost heir from a few owners back showing up and saying the property is actually hers -- the title insurance company will pay to defend you and will cover your ownership.
Title Insurance and Short Sales
In a short sale, you take the risk that the seller's lender won't remove itself from the title. If it doesn't fully accept the short sale and cancel its lien, you could end up having that bank on your back. If you buy title insurance, the insurer won't give you a clean policy unless all of the previous seller's debts are cleared from the title. Once they are, you should be protected if anyone comes back and lays claim to the property. Because sellers who are doing a short sale could have other types of financial trouble, short sale property titles can be a little risky, making title insurance particularly valuable.
Opting out of Title Insurance
Technically, you can buy a house in a short sale without buying title insurance coverage. While your mortgage lender will usually require it, if you're paying cash for the house, you get to make the decision. If you choose to go without title insurance, you will probably want to enlist the help of a real estate attorney to explain the risks and help you carefully review the property's title for potential problems. You could end up on the hook for any problems that arise that you can't anticipate, though. If you are buying property in Iowa, your only option might be to purchase the property without title insurance, because a state-run program replaces title insurance.
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