4 Common Questions About Title Insurance
“Title insurance… I’ve heard of it, but I guess I don’t really know what it is. What do I need it for and how do I go about getting it?”
This is a question we hear often from first-time home buyers, and while title insurance may not be the most glamorous topic, it is something you’ll undoubtedly need to know about prior to making one of the biggest purchases of your lifetime. So, if you’re looking to purchase a home, we recommend setting aside a few minutes to familiarize yourself with an important aspect of the home buying process—title insurance.
1. WHAT IS TITLE INSURANCE?
Title insurance is a type of indemnity insurance (just like car insurance or homeowners insurance) that protects against financial loss from defects in title to a parcel of property. These defects can be various types of unpaid liens (deed of trusts, sewer liens, tax liens etc.) or boundary issues, such as easements or your neighbor’s structures crossing boundary lines. Essentially, title insurance is designed to protect the owner’s and the lender’s interest in the property. Title insurance will provide for a litigation defense if a lawsuit is filed attacking the title and/or reimburse the insured for the monetary loss.
Putting it simply: If you take out a mortgage to purchase a home, you are required to have Title Insurance. It protects you and the lender (up to the amount of the loan) in the event that any problems arise with the home’s title after financing. For example, if you purchased a home not knowing that part of your home was built on public land or the neighbor’s property, the title insurance would protect you and the lender against any property loss you might experience because of this.
2. WHAT DOES A TITLE COMPANY DO?
Most people see a title company as simply the place where they close on their real estate transaction and where the escrowed funds are held. But, in addition to these services, a title company researches a property’s title history and is the broker for issuing title insurance. Title insurance can be issued in numerous countries across the globe and has been in existence in the United States since 1874 as a result of the case Watson v. Muirhead in Pennsylvania. The first title company came into existence way back in 1876.
Title insurance is issued by underwriters and uses individual brokers or title companies (such as Freedom Title) to sell the insurance. In order for a title company to be a broker for a particular underwriter, (such as First American, Alliant or Fidelity) there typically is a thorough vetting process into a title company’s officers, employees, claims history and operations.
Putting it simply: Besides issuing Title Insurance, title companies also research property records to look for and—when possible—remedy several types of issues that may arise.
3. WHAT IS THE TITLE INSURANCE ISSUING PROCESS?
The process of issuing title insurance is relatively consistent from one title company to the next. Generally, the steps are as follows:
Order Entry: The issuance of title insurance is a multistep process that begins with order entry. Order entry occurs when the title company receives a copy of the real estate contract or a mortgage company forwards to the title company an order form. Thus, relationships with mortgage companies, real estate agents and realty companies as a whole are essential to keeping the pipeline of orders flowing to the title company.
Abstracting and Examination: Once the Order has been entered the property is sent for abstracting. Abstracting is a process by which the correct legal description of a property is verified and any outstanding liens, unreleased deed of trusts, easements or other encumbrances are noted. Abstracting can be done internally with the use of internet resources or third party software that a title company pays monthly subscriptions for. Abstracting can also be accomplished by hiring an outside abstractor. Usually, outside abstractors are local individuals that are familiar with a specific county’s recorder of deeds’ office and the specific nuances required to be known to accurately search a property in that county.
Abstracting a property requires searching a property index in the Recorder of Deeds’ office for the particular county in which the property lies. The search must go back several years. Most title companies perform a 40-year search on the title history. The Recorder of Deeds indexes deeds and other instruments by the names of the grantor and the grantee. Each county is different and has nuances that make searching a property tricky. However, this is one of the more crucial steps of the title insurance process, because if a lien or unreleased deed of trust is not discovered in the title search, a claim for a cloud on title could arise.
Processing: Once a file “comes back” from abstracting (or simultaneously while the file is being abstracted), the file is submitted to the processing department. The Processing Department reviews the abstract, denotes open encumbrances and obtain payoffs as they are preparing the commitment for the title insurance policy. The Commitment is what is submitted to the lenders for approval. Open encumbrances will be listed on a policy as “exceptions.” An exception on a policy means that item listed as an exception will not be covered by the title insurance policy. As a general statement, it is best to be insured on an owner’s or lender’s policy with as few exceptions as possible.
Typical Elements of a Commitment
- Effective date
- Description of the Policy Type
- The interest exchanged (a Fee is a common law term of art for an interest in land)
- Legal Description
- Requirements Schedule B – section 1
- Exceptions Schedule B – section 2
Once the commitment has been prepared, it is provided to the lender for approval. The time it takes from Order entry to completion of Commitment Preparation is about 2 business days. Now it is time to finalize the closing date.
Once a closing date has been finalized, typically a title company’s closer will begin to prepare the closing documents. Some (but not all) of the typical closing documents are as follows:
- Closing Instructions from the lender if applicable
- FHA Insured Loan Addendum if applicable
- Settlement Statement
- Address Certification
- Purchase Processing Form
- Proof of Insurance (Binder)
- Appraisal invoice
- Copy of Driver’s License
- New Deed of Trust (with PUD Rider, Balloon Riders, Family Rider, Adjustable Rate Rider, Second Home Rider if applicable)
- Promissory Note
- New Deed if applicable
- Disbursement Request
- Marital Waiver
- Survey Affidavit
- Proration Agreement
- FDIC Waiver
- Judgment Affidavit
- Payoff Letter
- Various Mortgage related disclosures (depending on borrower)
- Flood Hazard Acknowledgment
- Signature/Name Affidavit
- Appraisal Disclosure
- Private Policy Notice
- Trust in Lending Disclosure
- Borrowers Certification and Authorization
- Operating agreement of LLC/Inc. if applicable
- Credit Score Notice
- Escrow Waiver
- W9 tax form
- Errors and Omissions Compliance Agreement
- Shortfall Agreement
- Notice of Right to Cancel (3 business days)
- Choice of Insurance Disclosure
- Federal Equal Credit Opportunity Act Notice
- Title Insurance Policies
Putting it simply: 1) As soon as a real estate contract it signed, title insurance is ordered. 2) The title company does extensive research to find any potential problems that may affect the ability to legally transfer ownership of the property. 3) Findings of the research are processed and a commitment is returned, outlining any encumbrances that are exempt from coverage by the title insurance policy. 4) The title company sets a closing date and prepares closing documents.
4. WHAT CAN I EXPECT AT CLOSING?
Closing can occur in the title company or at another location of the client’s choosing. Freedom Title offers mobile closings as an added convenience for the customer. For outside the title office closing, a “mobile closer” or third party notary is used. The closing agent or notary will walk a buyer or seller through the closing packet. The buyer’s side of a transaction is more involved as typically a lender and their required closing documents are included in the buyer’s package.
After signatures are obtained on all of the required documents, the customers are provided with a copy of their closing package. Then the banks receive a copy of the closing package and the title insurance policies are forwarded to the underwriter, along with the underwriter’s share of the title insurance premium. The broker retains a portion of the title insurance premium based upon the Agency Agreement between the underwriter and the broker. Additionally, the deeds and deeds of trust are sent for recording and the disbursement checks are forwarded to the appropriate parties.
Putting it simply: It’s best to be at the closing in person, but if you’re unable to be you can ask your realtor or title company about alternative options. At closing, you’ll be talked through several legal documents and asked to sign each.
If you’ve made it past you’re closing then that’s it! Your transaction is complete. Enjoy your new home or lower mortgage payment.
Freedom Title is here to answer any questions you may have about Title Insurance or the closing process. Please don’t hesitate to contact us.