Closing Fundamentals
Why Do I Need Title Insurance?
Title Insurance policies are issued to the new homeowner and the lender to assure financial protection against possible defects on the title. Title insurance is a means of protecting yourself from financial loss in the event that problems develop regarding the rights to ownership of your property. there may be hidden title defects that even the most careful title search will not reveal. in addition to protection from financial loss, title insurance pays the cost of defending against any covered claim.
Title Insurance Defined
The purchase of a home
is one of the most expensive and important purchases you will ever
make. You and your mortgage lender will want to make sure the
property is indeed yours and that no one else has any lien, claim or
encumbrance on your property.
As a homebuyer/owner, the
term Title Insurance is probably familiar -- but is it understood? What is your
dollar actually paying for when you purchase a title policy?
Title Insurers, unlike property or casualty insurance companies,
operate under the theory of risk elimination. Title companies spend
a high percentage of their operating income each year collecting,
storing, maintaining and analyzing official records for information
that affects title to real property. Their technical experts are
trained to identify the rights others may have in your property,
such as recorded liens, legal actions, disputed interests, rights of
way or other encumbrances on your title. Before closing your
transaction, the title company will proceed to "clear" those
encumbrances which you do not wish to assume.
This theory is different from that of most other insurance where,
for example, rates and anticipated losses are based on actuarial
studies and premiums are pooled on the assumption that a certain
number of claims will be made. The distinction is important: title
insurance premiums are paid to identify and eliminate potential
risks and claims before they happen. Medical and casualty insurance
premiums, for example, are paid to insure against an unpredictable
future event, knowing that risks exist and claims will occur.
Furthermore, title insurance involves a one-time premium, paid when
you close the real estate transaction, while property, casualty and
medical insurance require regular renewal premiums.
The goal of title companies is to conduct such a thorough search and
evaluation of public records that no claims will ever arise. Of
course, this is impossible -- we live in an imperfect world, where
human error and changing legal interpretations make 100 percent risk
elimination impossible. When claims arise, professional claims
personnel are assigned to handle them according to the terms of the
title insurance policy.
The issuance of a title insurance policy is highly labor-intensive.
It is based upon the maintenance of a title "plant," or library of
title records, in many cases dating back over a hundred years. Each
day, recorded documents affecting real property and property owners
are posted to these title plants so that when a title search on a
particular parcel is requested, the information is already organized
for rapid and accurate retrieval. This investment in skilled
personnel and advanced data processing represents a major part of
the title insurance premium dollar.
Your title insurance premium may actually amount to less than one percent of the purchase price of your home, and less than ten percent of your total closing costs. In some cases, if you have a Prior Owner's Title Policy, you may be eligible for a reissue rate. The title policy is good for as long as you and your heirs own the property with the payment of only one premium.
Additional Services and Cost Defined
Although the title company or escrow office usually serves as a
meeting ground for closing the sale, only a small percentage of
total closing fees are actually for title insurance protection.
You will usually be paying for such things as real estate
commissions, appraisal fees, loan fees, escrow charges, advance
payments such as property taxes and homeowner's insurance, title
insurance premiums, pest inspections, survey and the like.
The amount you pay for closing costs will vary; however, when buying your home and obtaining a new loan, an estimate of your closing costs will be provided to you pursuant to the Real Estate Settlement Procedures Act after you submit your loan application. This disclosure provides you with a good faith estimate of what your closing costs will be in the real estate process. An itemized list of charges will be prepared when you close your transaction and take title to your new property or at the time of your refinance closing.
Can I pay for my closing costs in installments?
No, and it is easy to understand why. Many different parties will
have fulfilled their responsibilities and incurred expenses and be
awaiting payment upon closing. The title or escrow company will
disburse money to those parties, pursuant to the escrow
instructions, when funds are available.
Will I be allowed to write a personal check to cover my closing
cost?
Your closing funds should be in the form of a cashier's check, issued by an institution from the state of your purchase, made payable to the title company or escrow office in the amount requested. A personal check may delay the closing or may be unacceptable to the title or escrow company, which is regulated by the state regarding fundings. An out-of-state check could also cause a delay in your closing due to possible delays in clearing the check.
Escrow Agent Responsibilities Defined
Refinancing, buying or
selling a home (or other piece of real property) usually involves
the transfer of large sums of money. It is imperative that the
transfer of these funds and related documents from one party to
another be handled in a neutral, secure and knowledgeable manner.
For the protection of borrower/borrower/buyer, seller and lender,
the escrow process was developed.
As a borrower/buyer or
seller, you want to be certain all conditions of sale have been met
before property and money change hands. The technical definition of
an escrow is a transaction where one party engaged in the sale,
transfer or lease of real or personal property with another person
delivers a written instrument, money or other items of value to a
neutral third person, called an escrow agent or escrow holder. This
third person holds the money or items for disbursement upon the
happening of a specified event or the performance of a specified
condition.
Simply stated, the
escrow agent impartially carries out the written instructions given
by the principals. This includes receiving funds and documents
necessary to comply with those instructions, completing or obtaining
required forms and handling final delivery of all items to the
proper parties upon the successful completion of the escrow.
The escrow holder must
be provided with the necessary information to close the transaction.
This may include loan documents, tax statements, fire and other
insurance policies, title insurance policies, terms of sale and any
seller-assisted financing, and requests for payment for various
services to be paid out of escrow funds.
If the transaction is
dependent on arranging new financing, it is the borrower/buyer's
responsibility to make the necessary arrangements. Documentation of
the new loan agreement must be in the hands of the escrow holder
before the transfer of property can take place.
When all the
instructions in the escrow have been carried out, the closing can
take place. At this time, all outstanding funds are collected and
fees--such as title insurance premiums, real estate commissions,
termite inspection charges--are paid. Title to the property is then
transferred under the terms of the escrow instructions and
appropriate title insurance is issued.
Payment of funds at the
close of escrow should be in the form acceptable to the escrow,
since out-of-state/town and personal checks can cause days of delay
in processing the transaction.
The following items
represent a typical list of what an escrow holder does and does not
do:
The Escrow Agent:
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Serves as the neutral "stakeholder" and the communications link to all parties in the transaction.
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Requests a preliminary title search, a "Commitment", to determine the present condition of title to the property.
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Requests a beneficiary's statement if debt or obligation is to be taken over by the borrower/buyer.
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Complies with related contract and/or escrow requirements.
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Receives deposit funds into escrow from the borrower/buyer and lender.
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Secures releases of all contingencies or other conditions as imposed on any particular escrow.
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Prepares or secures the deed, other documents and/or lender documents related to escrow.
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Prorates taxes, interest, insurance and/or rents according to instructions.
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Prepares final statements for the parties accounting for the disposition of all funds deposited into escrow. (these are useful in the preparation of tax returns).
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Schedule and coordinate the signing of the closing documents with a notary.
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Disburses funds as authorized by instructions, including charges for title insurance, recording fees, real estate commission and loan payoffs.
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Records deeds, mortgage and any other documents as instructed.
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Requests issuance of the title insurance policy.
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Closes escrow when all the instructions of the related parties to the transaction.
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