What Is Title Insurance?
There are two types of Title Insurance:
Lenders Title Insurance (also
called a Loan Policy)
- Most lenders require one
- Usually based on the dollar amount
of your loan
- Protects the lender’s interest
in the property should a problem with the title arise
- Policy amount decreases each year
and eventually disappears as the loan is paid off
Owner’s Title
Insurance
- Usually issued in the amount of
the real estate purchase
- Purchased for a one-time fee at
closing and lasts as long as you or your heirs have
an interest in the property
- Only Owners title insurance fully
protects the buyer should a problem happen with the
title that was not uncovered during the title search.
- Pays for any legal fees involved
in defending a claim on your title Payment and fees
Prices and the way title insurance is issued varies
state to state, therefore you must contact a title
company in your area to understand how it is to be
handled.
Protection by the title
company
For a title company to issue title insurance, they must
first search all public records for anything dealing
with or affecting that title. Some examples of items
that can cause a problem would be: deeds, wills and
trust that contain improper information; outstanding
judgments or tax liens against the property; and finally,
easements.
Unfortunately, hidden problems can emerge after closing.
Problems such as mistakes in the public record or forged
deeds could cloud the title but luckily owner’s
title insurance offers financial protection against
these by negotiating with third-parties, and paying
claims and legal fees in defending the title.
Common Problems
- Fraud & Forgery-
examples of hidden title hazards that can remain undetected
until after a closing despite the most careful precautions.
An owner’s title insurance policy protects financially
through negotiation by the insurer with third parties,
payment for defending against an attack on the title
as insured, and payment of valid claims.
- Conflicting Wills-
Conflicts over a will from a deceased former owner
can cause trouble five, ten, or twenty years down
the road for whomever the new owner of the property
is. Those stated in the will, have claim over the
property, but with insurance bought with the purchase,
the title company will pay the claim, along with any
additional amount in legal fees incurred during the
defense.
- Missing Heirs- For
a one time charge at closing, owner’s title
insurance will safeguard against problems including
those even an exhaustive search will not reveal. For
example, if a home was legally bought and some time
down the line, a proven heir is found, the heir may
be entitled to a share of the value of the home, but
your title insurance company will pay the damages,
not you.
First Owner? Think again
If you are buying a newly built home, there were most
likely many prior owners of the unimproved land. A title
search will uncover any existing liens and a survey
will determine the boundaries of your land being purchased.
Also, builders constantly fail to pay subcontractors
and suppliers and this could result in the subcontractor
or supplier placing a lien on your property.
Purchasing an owner’s title insurance will protect
you against these potential problems and pay for any
legal fees involved in defending a claim.
The Work Behind Closing
The day of closing should be a time of celebration,
whether you are purchasing your first home or your tenth.
While you’re packing, scheduling the movers and
ordering your utilities, can rest assured that your
settlement processor is working very hard behind the
scenes to make sure you closing goes smoothly. Here’s
a behind the scenes look at the settlement process:
Once an order is received, the race begins…
- Timing is essential to make sure
all the ingredients for a successful closing are in
place before your arrival:
- When the contract is received, the
processor reviews it for accuracy and completeness.
- If an earnest money or deposit check
is received, the processor will see that it is deposited
into an escrow account, where the funds will remain
until the time of closing.
- The processor will then request preliminary
title work. A title search will be done, and a title
commitment will be prepared.
- Once again, the processor checks
the information of the title commitment for accuracy
and completeness and compares it to other documents,
such as the contract and loan closing instructions
to make sure all information is consistent.
- While the title commitment is being
prepared, the processor is ordering payoff figures
from the existing lender (if the contract calls for
a mortgage to be paid off).
- The processor then orders property
inspections, surveys, termite reports and well and
septic tests (if necessary). If any problems or discrepancies
are discovered, the appropriate parties are told in
order for the problem to be corrected.
- Again, the settlement processor checks
all previous work for accuracy and completeness before
preparing the HUD-1 Settlement Statement which shows
all costs paid at closing as well as pre-paid costs,
such as earnest money deposit and loan application
fee. The lender will supply the settlement company
with their closing figures and loan documents to be
signed. This usually happens the day of or the afternoon
before closing.
- Now it’s closing day, and it’s
finally time to close the transaction and transfer
ownership of the property from the seller to the buyer.
If that buyer is you, welcome to your new home!
Useful
Information
The HUD-1 lists a complete accounting of the purchase
transactions. It’s the financial picture of the
closing. All money flowing in and out of settlement
appears on the form. “Buyers” are referred
to as “Borrowers” on this form even though
it may be used when there is no loan involved, such
as a cash transaction. We will refer simply to “buyers”
and “sellers”. The Contract or Escrow Agreement
is the written agreement between Buyer and Seller which
shows the purchase price of the home as well as the
“who-pays-what” information relating to
closing costs. The Loan Closing Instructions, provided
by the Lender, show all loan-related costs.
Title evidence, in the form of a title commitment,
title report or other document, reflects any existing
mortgages or judgment liens that must be satisfied or
paid off at time of closing.
It is the responsibility of the Settlement Agent to
see that all charges on the HUD-1 are substantiated
in writing and to see that all deposits and disbursements
are made in accordance with the HUD-1.
Parts of the HUD-1
Page 1 of the Settlement Statement is divided into
three main sections:
Section A-l: The top portion shows
the parties to the transaction are: Buyers, Sellers,
Lender and Settlement Company—along with the property
address and closing date.
Sections J and K: The bottom portion
of Page 1 is divided into two columns: Section J for
Buyers and Section K for Sellers.
J-scans Sections 100-300: Section
J is further broken down into the Buyer’s debits
(section 100), credits (section 200) and totals (section
300)
Section 100 Buyer Debits: Section 100 shows what the
Buyer owes, such as the purchase price of the home.
Line 103: Line 103 reflects the settlement
charges paid by the Buyer, which are itemized on Page
2 and carried over from Line 1400
Line 120: Line 120 is the total of
what the Buyer owes
Section 200 Buyer Credits: Section
200 shows what credits the Buyer has, such as the loan
amount, the deposit made by the Buyer and any money
owed to the Buyer by the Seller at time of closing,
such as pro-rations for taxes and assessments.
Section 300: Section 300 carries the
total down to the bottom of the page. Line 301 is the
same as Line 120. Line 302 is the same as Line 220.
Line 303 is the total “cash” due from the
Buyer at closing.
Line 303: Generally, the buyer is
asked to bring a cashiers check or other certified funds
for this amount to closing.
Sections J and K: Section K reflects
the credits, debits and totals of the seller and is
broken down into Sections 400, 500, and 600
Section 400 Seller Credits: Section
400 reflects the credits due the Seller at closing,
such as the sales price of the home.
Line 420: Line 420 shows the total
credits due to the Seller at closin
Section 500 Sellers Credits: Section
500 reflects the charges or debits of the Seller. Examples
include the settlement charges paid by the Seller (Line
502), payoffs of existing loans, pro-rations of items
such as taxes and assessments to be credited to the
Buyer at closing.
Line 520: Line 520 shows the total
debits due from the Seller at closing
Section 600: Section 600 carries the totals down to
the bottom of the form.
Line 601 is the same as Line 420. Line 602 is the same
as Line 520.
Line 603: Line 603 is the “cash”
due to the Seller at closing
Section L: Highlighted: Page 2 of
the settlement statement Buyer/Seller Columns contains
Section L, “Settlement Charges” with separate
Buyer and Seller columns. Section L is further divided
into Sections 700 through 1300, ending with Line 1400.
Line 700: Section 700 reflects the
amount of commission to be paid to the real estate brokers.
Section 800: Section 800 discloses
loan-related charges such as origination fees and discount
points.
“POC” Example: Any fee
the Lender requires to be paid “up front”
(at time of loan application), such as a credit report
fee, will be shown on the HUD-1 with the notation “POC”
for “Paid outside Closing”.
Section 900 Pre-paid: Section 900
reflects any prepaid items the Lender requires be paid
in advance, such as preliminary interest or the first
year’s hazard insurance premium.
Section 1000 Escrows: Section 1000
reflects escrow items, such as deposits for taxes and
insurance, which the Lender collects and holds for payment
for future bills.
Section 1100 Title: Section 1100 reflects
title charges payable to the title and/or settlement
company. Such fees may include settlement or closing
fees, abstract or search fee, title examination fee,
and title insurance premiums, among others.
Section 1200 Recording: Section 1200
reflects county and/or state recording fees for instruments
such as the deed and mortgage.
Section 1300 (Additional): Section
1300 reflects any additional settlement charges, such
as surveys or pest inspection fees.
Line 1400: Line 1400 reflects the
total charges for the Buyer and Seller
Line 1400 carried to Buyer 103: The
total due from the Buyer carried over to page 1, Line
103
Line 1400 carried to Seller 502: The
total due from the Seller is carried over to page 1,
Line 502
Once Satisfied, the buyer, the seller and the Settlement
agent will sign the HUD-1, certifying that the information
shown is accurate, so be sure to look over the statement
closely.
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