If you’re like most buyers, you know you need to deal with a title company and get title insurance but you’re not sure why. In this blog entry, I will break down for you what a title company does as part of your home purchase transaction and walk-through the various items on the ALTA settlement statement that you’ll receive and sign at your closing. I’m also going to give you an overview of title insurance and explain why it’s important and what it can protect you from.
What Does a Title Company Do?
A title company performs a number of important functions starting when a contract to purchase a property is ratified (i.e., signed by both parties). Once the title company receives the contract from your realtor, it will research title to the property by reviewing all documents related to the property in the public land records. Their goal is to find any “clouds” or defects on title that could affect the purchasing party’s ownership of the property. Defects might include that the legal owner and seller of the property are different, that there are liens on the property (e.g., a contractor placed a mechanic’s lien for unpaid work and it’s not been removed), or that there are unpaid taxes that will have to be cleared up before the property can be sold. All defects the title company finds will be communicated to the seller and lender as soon as possible in order that steps can be taken to “cure” or correct the problems. As a buyer, you want to receive clear and marketable title to your new property at the time of closing. And, your lender is not going to give you a loan if there is an issue hanging over title to the property.
The next function a title company performs is to prepare the documents to be signed at settlement as well as the final ALTA settlement statement (which replaced in 2015 the HUD-1 which you may have dealt with before). The title company will prepare the deed transferring title to the property from the current owner to the new buyer. Also, the lender and title company will work hand-in-glove with respect to the other documents that need to be signed at closing to effectuate the loan (e.g., the promissory note and purchase money deed of trust). At closing, the title company acts as the settlement/escrow agent, overseeing the signature of documents by the buyer and seller and making sure that the lender has everything it needs to begin to lend to the buyer and to pay off the seller’s existing mortgage. Right after the closing, the title company handles all the wiring of money among the parties so that the seller and existing mortgage holder get paid, the realtors involved in the transaction earn their commissions and the lender receives the down payment paid by the buyer. Perhaps the most important function of the title company immediately post-closing is to record the legal documents (i.e., deed, mortgage, assignments, etc.) at the local courthouse. By recording the new deed, the title company ensures that the new buyer goes on record as being the owner of the property. Be sure that the title company sends you a copy of the recorded deed for your records.
What Are All These Title-Related Items and Costs on My Settlement Statement?
During the closing, the title company will use the ALTA settlement statement to guide each of the buyer and the seller through their respective sides of the transaction. The settlement statement is a critical document as it itemizes all the costs, fees and payments for each side of the transaction. The big difference between the new format of settlement statement and the HUD-1 is that the new statement is different for each of the buyer side and seller side and doesn’t show a side by side comparison of credits and debits. In a way, each party to the transaction is now looking at their side of the deal in isolation from the other. Whether you think this is a positive change or not, the new format is here for now so you’ll need to work with it. Key elements of the statement are:
- Mortgage lender’s charges;
- Charges for preparing documents;
- Title company’s fees;
- Recording costs;
- Amount of the payoffs to release any existing mortgages;
- Pro-ration of city and county property taxes;
- Pro-ration of homeowner’s insurance and condo fees (if applicable);
- Real estate agent commission fees,
- Survey fees, and
- Any other costs associated with the transaction.
When you review the settlement statement at closing, you’ll want to make sure it looks substantially similar to the Closing Disclosure that your lender will have asked you to approve a few days before closing. If there is any amount that is off on your settlement statement, seek clarification from the title company and get comfortable with the amounts. Once you sign the statement, you’re accepting all fees, charges and payments and moving forward with the purchase so it’s important that the statement is 100% correct.
What Is Title Insurance and Why Do I Need It?
Like any insurance, the aim of title insurance is to protect you from the unforeseeable and make sure you do not lose money or your property as a result of something outside of your control and/or knowledge. Title insurance is an insurance policy that covers any problems (also known as “title defects”) that arise with respect to your title on the property after you buy or refinance a property. Those problems can range from an undisclosed (but recorded) prior mortgage or lien that affects your title to the property to a fraudulent act (yes, sometimes people sell property they don’t actually own) to your deed being recorded incorrectly.
The last thing you want to do is bear responsibility for any of these kinds of issues. While the probability of such defects arising may be relatively low, it happens enough that you probably shouldn’t take the risk. Plus, in many instances, your lender will require a lender’s policy of title insurance so that its interests are protected and it can more easily sell the mortgage to its investors. If you’re interested in seeing an exhaustive list of the various title defects that can arise, check out First American Title’s 70+ Ways to Lose your Property. When you read all these, you’ll run, not walk, to purchase title insurance.
You can buy title insurance from a title insurance company or from a title agent who sells policies on behalf of a company. The cost for the insurance depends on the value of your property. The good news about title insurance is that you buy it at the time of closing and never pay premiums again. The coverage goes into effect from the time of closing for so long as you have an interest (i.e., own all or a portion of the property) in the property. If you die, the coverage runs with the property for the benefit of your heirs. If you sell the property, and give warranties of title, the coverage also continues. The insurance itself covers the full value of your property as well as the cost of legal expenses necessary to investigate, litigate or settle an adverse claim against your property.
When considering buying title insurance, know that there are two types of policies: (1) an owner’s policy of title insurance which protects your interests as owner of the property and (2) a lender’s policy of title insurance which protects the lender from being responsible for any title defects. Owner’s policies come in two basic forms: (1) standard coverage and (2) extended or enhanced coverage. Standard coverage is what most buyers purchase and covers you for the full value of your property plus legal expenses against the most common types of title defects (e.g., undisclosed (but recorded) prior mortgage, easement or lien). Extended or enhanced coverage covers additional more atypical title defects (e.g., silent/off-record liens such as mechanics’ or estate tax liens) and tends to cost approximately 20% more than standard coverage. As for the lender’s policy, while it only protects the interests of the lender, your lender will likely require you buy the lender’s policy for them at the time of closing. Just another cost of getting the loan, unfortunately. It will be issued for the amount of the mortgage and the coverage decreases as you pay down the loan. When you pay off the mortgage, the policy ends.
*Please note that I write this blog in my capacity as a Virginia-licensed real estate salesperson and not in my capacity as a District of Columbia and New York-licensed attorney.