Basics of Title Insurance
There's another kind of insurance you buy when you buy a house or refinance: title insurance. It's an unusual kind of policy because it protects against something that might have happened in the past, rather than something that might happen in the future.
Title defects aren't common, but when they occur, the consequences can be disastrous.
Title insurance protects the lender or owner from disputes over ownership of property. When you buy real estate, someone checks land ownership records to find out if the seller has the right to sell it and collect the full payment.
Perhaps the seller is divorced and needs the ex-spouse to sign a document allowing the sale to go through. Or maybe an unpaid electrician put a mechanic's lien on the property, ensuring payment when the property is sold. The county might have filed a lien to satisfy unpaid taxes. And, of course, the mortgage lender has a lien on the property, ensuring that the loan is repaid before the sales proceeds go to anyone else.
One seller found out to his surprise that there was a "cloud" (title defect) affecting title to his property. The title search on his property showed that a deed had been recorded transferring title from the previous owner to himself. But that deed was signed by only one of the two owners.
Due to an oversight, the wife's signature wasn't on the deed. This meant that the wife could still make a claim to the property. In effect, she was still in title as an owner because she hadn't transferred her interest in the property.
A good title
Your real estate purchase contract should include a clause that requires the sellers to provide you with good or marketable title to the property at closing. If the sellers are unable to do this, you should be able to withdraw from the contract without penalty.
In the example above, the buyer's title insurance company was able to track down the wife's heirs and get the signatures necessary to remove the cloud on the title. The defect in the title report was corrected and the sale went through.
Most buyers take out a mortgage when they purchase a home. But before a lender will issue a mortgage, there will need to be evidence that the buyers will receive good title to the property. Also, the lender will require that a title insurance policy be purchased, usually at the buyer's expense, guaranteeing the lender's interest in the property.
Title insurance is paid for on a one-time-only basis. It is not transferable from one party to another.
Tip for first-timers
A lender's policy of title insurance won't protect the buyers' interest, but buyers can get title insurance for their own protection. Even if you're paying all cash for a property, and won't need a mortgage, it's wise to obtain a title insurance policy to protect yourself. Title insurance for the buyer can be paid for by either the buyer or seller. Who pays is often determined by local custom. The cost is based on the purchase price: the higher the price, the higher the title insurance premium.
Searching the records
Before issuing a policy of title insurance, title examiners search the public records for records that affect the property in question: such as liens, judgments and easements. An easement grants the right to use another person's property for a specific purpose.
The title search is designed to dig up all of these things and more. Later, if there is a dispute and a lawsuit over ownership of the property because the title search was faulty, the title insurer pays legal fees and any settlement amount. When you pay for title insurance, you're paying for two things: the title search and the insurance policy that pays the costs of future legal proceedings.
There are two kinds of title policies when you buy a house. One covers the lender (you have to pay) and the other covers you, the buyer. You'll always be required to get the former, and it's often a good idea to buy the latter.
Make sure you understand the kind of title insurance you're buying, for there are several kinds available. If you have a question about anything in your title search, ask your title insurer or attorney for an explanation before you close.
The closing is the end of the long and arduous process of buying a house. It refers to the day you close the deal on a piece of real estate and on the mortgage to buy that real estate. Essentially it's the final transfer of money and keys. When you walk out of the agent's office, you own a new home.
Just like every mother has a labor story, every homeowner has a tale of woe and wonder about a closing. For a first-time home buyer who has heard these stories, the closing takes on a peculiar mystique complete with anxiety and drama.
Let's start our guide to the big day with the most important piece of advice: You'll want a good night's sleep before closing. It's an exciting and stressful time during which a lot of legal and financial information will be thrown at you. Many folks, who actually attempt moving on the day of the closing, double the anxiety, workload and chance of error. So rest up.
Timing is everything
Timing is critical when scheduling the transaction. Here are a few things to consider:
- Current living situation. If you are renting, you'll want to schedule the closing around the time your lease ends. If your plan is to do some work on your new home before moving in, pick a date a couple of months before you have to move from your rental. If you'll be moving out of a house that you are selling, you'll be juggling two closing dates. Most folks need the cash out of the first house to pay for the second house, so schedule the closings in the right order. But beware; two closings in one day will make for a headache. However, it's over in one fell swoop.
- Mortgage considerations. Make sure the closing date is set before your lender's commitment -- or any interest rate lock -- expires.
- Work schedule. Though most well-run closings last only about an hour, you don't want to try to squeeze this into a lunch break. Things can go wrong. And hey -- this is a huge day in your life, so take at least half of it off from work.
- Moving. If you plan to move the day you close, schedule the paperwork as early in the day as you can.
- Yearend. If you are scheduling a closing at the end of the year, keep taxes in mind. Any points and interest paid before the New Year can become deductions for this year's taxes. Check with a tax adviser for the timing of any other deductions.
Sign here ... and here ... and here
Most closings are actually two closings. You'll be closing on the purchase of real estate, and you'll be closing on the mortgage loan you are taking to buy that real estate. All that paperwork will have to do with one or the other. Some documents are common to most closings, and other documents will be unique to your area or situation.
Mortgage documents you can expect to see, read and sign, will include:
- Truth in lending statement, also known as Regulation Z. This important piece of paper will disclose the interest rate, annual percentage rate, amount financed and the total cost of the loan over its life. These are important numbers to check and double check before signing. This is not a time for surprises.
- Itemization of amount financed. This document is like an addendum to the Truth in Lending statement. It summarizes the finance costs, such as points.
- Monthly payment letter. This document reveals the break down of your monthly payment into principal, interest, taxes, insurance and any other monthly escrows. Again, look for any surprises.
- Note. Take a deep breath when signing this. This is where you're actually borrowing the money -- and giving your personal guarantee to pay it back. Gulp.
- Mortgage. Take a second deep breath with this one. This paper puts a lien on the house as security for the loan -- allowing the bank to foreclose if you default on the note mentioned above.
Then there are the real estate documents that will finally make the house yours. Yippee. Now it's getting fun.
- HUD Form 1 or Disclosure/Settlement Statement. This is another one to read carefully (though, of course, all these papers are important and need to be read). The form will contain all the actual settlement costs and amounts. Again, this is a paper ripe for typos and errors. The closing agent will go over this document with the buyer and seller. Do pay attention.
- Warranty deed. This is the document that brought all these people to the table. This document should include the names of the buyer, the seller and a description of the property. Often this deed also guarantees that the seller has the right to sell the property. With the signatures of the seller and buyer, this piece of paper transfers the title of property. Savor this particular signing; it's the real deal.
- Proration agreements. These describe how you and the seller are divvying up the costs of the house for the month in which it is being bought. For example, the seller may have already paid the property taxes, so the buyer needs to reimburse the seller for the portion of the tax bill that covers the time after the buyer takes over the property. Or in reverse, the seller may not have paid the quarterly homeowner's association fees yet. The buyer will be paying this, but at the closing, the seller reimburses for the period he was still living in the house. In the end, lots of little bits of money may go back and forth across the table -- at least on paper.
- Tax and utility receipts. You'll probably also be signing various city and state receipts acknowledging that this or that has been paid by the seller or will be paid by the buyer.
- Name affidavit. Here's where too many legal technicalities get annoying. This document is certifying that you are who you say you are.
- Acknowledgment of reports. More legalese assures that the buyer has seen all of the reports regarding the property. These can include surveys and a termite inspection.
- Search or Abstract of Title. This one would make excellent bedtime reading for an insomniac. The abstract gives a listing of every document that has been recorded about this particular piece of property. Don't worry, this doesn't obligate you to anything, but it does give you the history of the house.
Hand over the money
The closing is not the day to forget your lunch money. The buyer and sometimes even the seller are expected to have some dough ready to hand over during this fateful meeting. You should be informed of the amount you need before the meeting. If you are not, call and ask. You'll want to bring a certified check for the correct amount.
Here are a few things a buyer will be paying for at the closing:
- Closing costs. Expect to pay a portion of the closing costs. These can vary from state to state and even from county to county. Also, most are negotiable (ahead of time), so closing costs can vary greatly.
- Payment for the house. The buyer brings the down payment (if any) at this time, minus any earlier deposit(s). It is given to the closing agent, along with the lender's check for the balance.
- Escrows. Often the buyer's annual taxes, insurance and other items are paid through the lender. An escrow account (or reserve) will be established at this time.
For more helpful information on the home closing process, visit Home Closing 101.