If you've ever purchased a home, it's possible you've heard title insurance discussed however there is often some confusion about this vital part of the home buying process.
What Does a Title Company Do?
When you make an offer to purchase a home - how can you be sure that there are no issues or problems with the home's title? How do you know that the seller actually owns the property? A title company will run a title search on the property to answer these questions.Lenders require a title search to prevent fraudulent sales. A title search will ensure that the seller is the owner of the home and attempts to uncover an "encumbrances" that may be on title. Encumbrances include any liens (legal claims) against the property filed by either creditors in an attempt to collect unpaid bills or by the IRS for unpaid taxes. Contractors liens, unpaid homeowner dues and unpaid child support are all examples of other possible issues. These encumbrances must be resolved (paid) either before or at closing.
The title professional will search the public records which involves reviewing land records that go back many years. More than one third of all title searches reveal a title problem that title professionals will need to fix before you can close. This should not only be important to lenders but also to buyers, as in many cases, encumbrances follow the property - not the owner.
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What is Title Insurance?
To help further protect the lender and buyer and ensure that indeed, the seller is transferring a "marketable title," the lender will require that title insurance be purchased. There are two types of policies that you will be required to purchase at closing:- A Lender's Policy (ALTA) - the lender's policy protects the lender in the event that an issue is detected in the title AFTER the property has been purchased. The lender's policy is usually based on the dollar amount of your loan. The policy amount will decrease each year and eventually dissolve once the loan is paid off.
- An Owner's Policy (CLTA or ALTA) - the owner's policy helps protect you and is usually issued in the amount of the property purchase price. It is purchased at closing and lasts for as long as you or your heirs have an interest in the property. Possible hidden issues with title that an owner's policy can protect you from include:
- Errors or omissions in deeds
- Mistakes in examining records
- Forgery
- Undisclosed heirs
How does this impact the transaction?
In many cases, title and escrow are handled by the same company however, this varies depending on the company and state requirements. The escrow officer at the title company is a neutral third party in your transaction. They require any instructions to be written and official. They will receive instructions from the seller or seller's agent, from the buyer or buyer's agent and from the lender (plus any other parties requesting funds such as home inspectors, insurance agents and pest companies). All instructions must agree - if there are any conflicts, they cannot proceed until the instructions are resolved.
After your mortgage loan has been approved, the lender will prepare the documents for you to sign and send them to the title company. The escrow officer will then prepare the documents and meet with you to have you sign them. They will also inform you as to exactly how much money is necessary to close escrow. Once you have signed the documents, the escrow officer will return them to the lender for review. Once the lender confirms everything is properly completed - they will "fund" the loan which means that they wire the money to the title company who in turn, records the documents and disburses funds to appropriate parties.
FAQ - Do I need title insurance if I'm refinancing?
Yes! When you refinance, you are obtaining a new loan which means that the lender will request a new title search to protect their investment. In this case, they will be looking to see if the property has acquired any new encumbrances with you as the owner. In some states, you can ask to qualify for a "refinance or reissue" rate which can save you some money if you meet the criteria.
FAQ - Do I need title insurance if I'm buying a newly built home?
Yes! While you may indeed, be the first owner of the home, it is possible that the lot has been held by multiple owners. A title search will uncover any contractors liens and a survey will determine the boundaries of the property.
Remember that title insurance is meant to uncover potential problems BEFORE you buy the home. This is for your protection so while it might seem like an unnecessary cost - it's better to be safe than sorry!
Midwest Equity Mortgage
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