Why Title Insurace
Determining that your rights and interests to the property are clear is the business of a title insurance company.
For a modest, one-time title insurance premium, you will receive continuous title insurance protection in an amount equal to the purchase price of the property.
Determining that your rights and interests to the property are clear is the business of the title insurance company. One of the marked advantages of title insurance is that prior to a policy being issued, the title insurance company completes extensive research into relevant public records, maps and documents to trace ownership of the property and determine if anyone other than you has an interest in the property.
Through its research, the title insurance company can usually identify any title problems that may arise and have these problems cleared-up prior to closing. Your title insurance owner's policy will describe the property and outline any recorded limitations on your ownership.
It will also set forth the title insurance company's responsibilities should any claim covered by the policy terms arise.
Types of Insurance
What are homeowner's insurance, private mortgage insurance and title insurance?
A homeowners insurance policy is a package policy that combines more than one type of insurance coverage in a single policy. There are four types of coverages that are contained in the homeowners policy: dwelling and personal property, personal liability, medical payments, and additional living expenses.
Homeowner's insurance, as the name suggests, protects you from damage or loss to your home or the property in it. Remember that flood insurance and earthquake damage are not covered by a standard homeowners policy. If you buy a house in a flood-prone area, you'll have to pay for a flood insurance policy. The Federal Emergency Management Agency provides useful information on flood insurance on its Web site at www.fema.gov. A separate earthquake policy is available from most insurance companies. The cost of the coverage will depend on the likelihood of earthquakes in your area.
Private mortgage insurance and government mortgage insurance protect the lender against default and enable the lender to make a loan which the lender considers a higher risk.
Lenders often require mortgage insurance for loans where the down payment is less than 20 percent of the sales price. You may be billed monthly, annually, by an initial lump sum, or some combination of these practices for your mortgage insurance premium.
Mortgage insurance should not be confused with mortgage life, credit life or disability insurance, which protect you and are designed to pay off a mortgage in the event of your death or disability. You may also encounter lender paid mortgage insurance (LPMI).
Under LPMI plans, the lender purchases the mortgage insurance and pays the premiums to the insurer. The lender will increase your interest rate to pay for the premiums -- but LPMI may reduce your settlement costs. You cannot cancel LPMI or government mortgage insurance during the life of your loan. However, it may be possible to cancel private mortgage insurance at some point, such as when your loan balance is reduced to a certain amount.
Title insurance is usually required by the lender to protect the lender against loss resulting from claims by others against your property.
A lenders title insurance policy does not protect you. Neither does the prior owners policy. If you want to protect yourself from claims by others against your new property, you will need an owner's title policy.
When a claim does occur, it can be financially devastating to an owner who is uninsured. If you buy an owner's policy, it is usually much less expensive if you buy it at the same time and with the same insurer as the lender's policy.
To save money on title insurance, compare rates among various title insurance companies. Ask what services and limitations on coverage are provided under each policy so that you can decide whether coverage purchased at a higher rate may be better for your needs.
However, in many states, title insurance premium rates are established by the state and may not be negotiable.
Before you reach the closing day, you will want to make a decision as to how you will hold title to the property. This decision has legal, tax, and estate planning ramifications. Therefore, it may be prudent to consult an attorney or certified public accountant (CPA). The following information is supplied for informational purposes and should not be relied upon as legal definitions.
Buying Alone Sole Ownership
A single individual who has not been legally married. An unmarried individual who was married and is now legally divorced. A married individual who wishes to acquire title in his or her name alone.
A living trust is created while an individual is alive and gives the individual control of the distribution of his or her estate. The individual transfers ownership of his or her property and assets into the trust.
Buying with Others
Tenants in Common enables each partner in the property to sell, lease or will to his/her heirs that share of the property belonging to him/her.
Who can take title? Any number of individuals.
Ownership Division: Any number of interests, equal or unequal.
Who holds title? A separate legal title to his undivided interest is held by each co-owner.
Possession: Equal right of possession.
Property owned by multiple individuals where if one of the owners dies, the remaining owners acquire the share of the deceased owner.
Who can take title? Any number of individuals.
Ownership Division: Interests cannot be divided.
Who holds title? There is only one title to the whole property.
Possession: Equal right of possession.
Additional Ways to Hold Title
A corporation is a legal entity, created under state law, consisting of one or more shareholders, but regarded under law as having essentially the same as those of an individual. The entity has continuous existence until it is dissolved according to legal procedures. Land owned by a corporation cannot be attached for personal debts or judgments rendered against any of its shareholders.
A partnership is an association of two or more persons who can carry on business for profit. A partnership may hold title to real property in the name of the partnership with partners having an equal or an unequal interest in the property.
A trust is an arrangement whereby legal title to property is transferred by the grantor (or trustor) to a person called a trustee, to be held and managed by that person for the benefit of the people specified in the trust agreement, called beneficiaries.
There are so many different charges involved in buying a home, it is important to know what to expect at the settlement.
Your lender may be required to give you an Estimate of your settlement costs. Review the charges below to avoid any surprises when you sit down to close on your loan.
There are three basic categories of settlement costs:
1. Fees to obtain a mortgage.
This includes lender fees and points, as well as a host of other charges involved in obtaining and processing your loan. Points are an upfront charge expressed as a percent of the loan amount (e.g., 1 point is 1 percent of the loan) to increase the lender's effective yield on a loan. Specific lender fees can include:
- Loan Origination Fee: This is a charge for your lender's work in evaluating and preparing your mortgage loan.
- Application Fee: This charge covers the initial costs of processing your loan application and obtaining your credit report.
- Appraisal Fee: Your lender will need an opinion from an independent appraiser of the market value of the home you wish to purchase.
- Survey: This fee goes to a surveying firm who will verify that your lot has not been encroached upon by any structures since the last survey conducted on the property and to ensure that the home and other structures are legally where the seller says they are.
- Mortgage Insurance: A lender may require this type of insurance for buyers who make a down payment of less than 20 percent of the value of the house. The policy covers the lender's risk in the event the buyer fails to make the loan payments. Premiums are typically paid annually from an escrow or reserve account, or in a lump sum at closing.
- Homeowner's Insurance: Insurance that protects property against loss caused by fire, some natural causes, vandalism, etc., depending on the terms of the policy. Also includes coverage such as personal liability and theft away from home. Your lender will expect you to have a policy in effect by closing.
2. Fees to establish and transfer ownership of the property.
Your lending institution is not likely to give you a loan on a house unless you can prove that the seller owns the property you want to buy. This is where title search and title insurance fees come into play. A title agent will verify that the seller is, indeed, the owner of the property and issue a title insurance policy to guard the lender against any errors that could have occurred in the searching process. The cost of the policy is usually based on the loan amount. There may also be attorney, escrow, courier fees and other charges involved in the settlement process.
3. Fees to state and local governments.
These fees include transfer, recordation, and property taxes collected by local and state governments. Your taxes are based on the assessed value of the home, which pay for community services such as schools, public works, and other costs of local government. Taxes can often be paid as a part of your monthly mortgage payment.
Mortgage vs. Deed of Trust
Many of us incorrectly call our home loan a mortgage, but in fact, a mortgage is not what your lender gives you to buy a home.
A mortgage is actually the formal document proving the legal claim or lien on a piece of property that you give to the lender who holds it as security for the money you borrowed. The lien is recorded in public records.
On a mortgage, you pledge the property as security for the repayment of your loan, but you do not transfer title to the lender. If you (the mortgagor) repay your loan in accordance with the terms of the mortgage, it is canceled or satisfied by the lender (the mortgagee).
However, if you do not repay your debt, the lender has the right to sell the secured property to recover funds through a court proceeding called foreclosure.
In some states, a deed of trust is used in place of a mortgage.
While a mortgage involves two people (the borrower and the lender) a deed of trust involves three people - the borrower (or trustor), the lender (the beneficiary) and a trustee, a neutral third party, such as an attorney or a title agent.
The deed of trust is also recorded in public records. In a deed of trust transaction, the borrower transfers the legal title for the property to the trustee who holds the property in trust as security for the payment of the loan to the lender.
The deed of trust is cancelled when the debt is paid. However, if you default on your payment of the loan, the trustee may sell the property at the request of the lender without a court proceeding.
To finalize the sale of the home, a neutral, third party (the escrow holder, a.k.a. escrow agent) is engaged to assure the transaction will close properly and on time.
The escrow holder ensures that all terms and conditions of the seller's and buyer's agreement are met prior to the sale being finalized, including receiving funds and documents, completing required forms, and obtaining the release documents for any loans or liens that have been paid off with the transaction, assuring you clear title to your property before the purchase price is fully paid.
The documentation the escrow holder may be collecting includes:
- Tax statements,
- Fire and other insurance policies
- Title insurance policies
- Terms of sale and any seller-assisted financing
- Requests for payment for various services to be paid out of escrow funds
- Upon completion of all instructions of the escrow, closing can take place.
All outstanding payments and fees are collected and paid at this time (covering expenses such as title insurance, inspections, real estate commissions).
Title to the property is then transferred to the buyer and appropriate title insurance is issued as outlined in the escrow instructions.
At the close of escrow, payment of funds shall be made in an acceptable form to the escrow.
The Escrow Holder Will:
- Prepare escrow instructions
- Request title search
- Comply with lender's requirements as specified in the escrow agreement
- Receive funds from the buyer
- Prorate insurance, tax, interest and other payments according to instructions
- Record deeds and other documents as instructed
- Request title insurance policy
- Close escrow when all instructions of seller and buyer have been met
- Disburse funds and finalize instructions
The Escrow Holder Won't:
- Give advice - the escrow holder must maintain neutral, third-party status
- Offer opinions about tax implications
Mortgage Escrow Account
A Mortgage Escrow Account is established to pay on-going expenses while there is a loan on the house. These expenses include property taxes, home insurance, mortgage insurance, and other escrow items. Generally, the Escrow Account is partially funded at closing and the home buyer makes on-going contributions through their monthly mortgage payment.