The Title & Escrow Process
The home buying process is, by its very nature, a complex transaction. Title Insurance is an important part of the real estate transaction since it insures you that all liens placed against the prior owners of the property, or documents that will restrict your use of the property, have been fully disclosed to you.
A Preliminary Title Report provides you with an opportunity to review any impediments that would prevent clear title from passing to you.
When reviewing a Preliminary Title Report, it is important to check the extent of the ownership rights or interest you will be acquiring. The most common form of ownership interest is 'fee simple' or 'fee,' which is also the highest form of interest an owner can have in real estate. Liens, restrictions, and interests of others will be listed numerically as exceptions in the report.
You may also have to consider interests of third parties, such as easements granted by prior owners, which limit use of the property. Some buyers attempt to clear these unwanted items prior to purchase. A list of standard exceptions and exclusions not covered by the title insurance policy is also attached. This section includes items the buyer may want to investigate further, such as laws governing building and zoning.
What Is Title Insurance?
Generally, there are two forms of title insurance. Lender's title insurance, required by most lending institutions, is normally written in the amount of the mortgage and protects the lending institution from losses resulting from title defects.
Because lender's insurance expires when the mortgage is repaid, you may benefit from the second form of title insurance known as an owner's title policy. It usually is written for the amount of the purchase price of the home. This protection starts the day of the closing and lasts as long as you or your heirs retain an interest in the property.
Unlike other insurance premiums, your title insurance premium is paid only once, at the closing. By purchasing owner's and lender's protection simultaneously, substantial savings in title insurance premiums can be realized.
After all fees have been paid and documents signed and notarized at the closing, you will receive a copy of each and, most importantly, title to your house.
What Is A Title Search?
Issuing a title insurance policy is an extensive and exacting process. Title insurance companies work to eliminate risks by performing a painstaking search of the public records, or the title company's own "plant", where public records, laws, and court decisions pertaining to the property and the parties to the escrow are maintained. This is done to determine the current recorded ownership, recorded liens or encumbrances, and other matters of record which could affect the title to the property. Once a title search is complete, the title company issues a Preliminary Title Report detailing the current status of title.
What Is A Preliminary Title Report?
A Preliminary Title Report contains vital information which may affect the willingness and the ability of the parties to close an escrow. Information includes ownership of the subject property, the manner in which the current owners hold title, matters of record which specifically affect the subject property or the owners of the property, as well as a legal description of the property and an informational plat map.
The Preliminary Title Report indicates the type of title insurance to be offered by the title company, and the exclusions and exceptions from coverage based on the type of title insurance policy the company intends to issue. Exclusions and exceptions can include items such as: recorded deeds of trust, easements, agreements, and covenants conditions and restrictions, commonly referred to as CC&Rs.
What Should Be Looked For In A Preliminary Title Report?
As your real estate representative, we will review the Preliminary Title Report as soon as it is issued, paying particular attention to the following items:
- Verifying the ownership vesting by insuring that the names on the report are the same as the names on the purchase contract. Sometimes the name of an unexpected owner will appear (i.e. a previous spouse or relative who died), and corrective documents may be required.
- Verifying that the property address, the plat map, and legal description all match. An owner could own two properties adjacent to, or across the street from, each other, causing confusion in identifying the correct property.
- Reading the informational notes for pertinent items about the property, such as: transfer taxes, monument fees, homeowners' association fees, etc.
- Carefully reviewing the exceptions. Common exceptions include: current taxes, bonds, deeds of trust, Mello-Roos Assessment District items, CC&Rs, and easements. Be sure the CC&Rs or existing easements don't interfere with the buyer's future plans. For example, an easement across the backyard could have a profound effect on the buyer's ability to add a swimming pool at a later date.
- Always looking for surprises. If you can't locate an easement, or an unexpected deed of trust shows up, or you see an item you weren't aware of before, immediately call the escrow officer or title company to discuss the matter. The title company should be a problem solver, and top-notch escrow officers and title companies go out of their way to resolve quickly the majority of "red flag" items. However, the responsibility for early detection and resolution of problems falls on the entire escrow team, including the agents, the escrow and title company, and sometimes the buyers and sellers as well.
Not all risks can be eliminated by a title search, since certain "hidden defects", such as forgeries, identity of persons, incapacity, incompetency, and failure to comply with the law, cannot be disclosed by an examination of the public records. While the Preliminary Title Report is an offer to insure under certain circumstances, the Title Insurance Policy is a contract, providing coverage against such "hidden defects."
In addition to indemnifying the insured against losses which result from a covered claim, the policy also provides for legal fees and defense for future claims against the property.
Extended owners' and lenders' policies of title insurance provide broader coverage and are available through the American Land Title Association (ALTA). Coverage is extended to certain matters that are "off-record", but which are generally discoverable by an inspection of the property or by questioning the parties in possession. These include:
- Unrecorded liens and encumbrances
- Unrecorded easements
- Unrecorded rights of parties in possession
- Encroachments, discrepancies, or conflicts in the boundary lines
ALTA policies are available for owners and lenders, and a "plain language" ALTA Residential Policy is also available for residential property containing one to four units.
Agents, buyers, and sellers should not assume that all title insurance policies and title companies are the same. They aren't, and it is important to ask questions of your title company to determine the type and cost of coverage available.
What Exactly Is An Escrow?
An escrow occurs when a neutral third party holds the documents and monies involved in a real estate transaction and ensures that all conditions of the transaction are met. Escrow also refers to a special account that a lender establishes to hold monthly installments from the borrower to cover property taxes and insurance.
What Does An Escrow Holder Do?
An escrow holder is a neutral third party who takes instructions based on the terms of the real estate transaction and, when necessary, the lender's requirements.
What Are The Duties Of The Escrow Holder?
- Receiving and holding all monies, instructions, and documents pertaining to the real estate transaction.
- Serving as the communication link and liaison between all parties.
- Requesting a preliminary title search to determine the condition of title to the property.
- Requesting a beneficiary statement or payoff demand from existing lenders.
- Holding inspection reports, deeds, and insurance documents.
- Complying with the lender's requirements in its instructions to escrow.
- Preparing or obtaining the grant deed.
- Prorating taxes, interest, insurance, rents, and other costs related to the property.
- Recording the deed and other documents.
- Requesting the title insurance policy.
- Closing the escrow according to the instructions of the buyer, seller, and lender.
- Disbursing funds as authorized by the instructions, including charges for real estate commissions, loan payoffs, title insurance, taxes, recording fees, and other costs.
- Preparing final statements of disposition of all funds.
Key terms and phrases commonly associated with escrow include:
Escrow payment:
Funds that a mortgage servicer withdraws from a borrower's escrow account to pay property taxes and insurance.
Escrow analysis:
A lender's periodic examination of an escrow account to determine if the lender is withholding enough funds from a borrower's monthly mortgage payment to pay for expenses such as property taxes and insurance.
Back-to-back escrow:
Arrangements that an owner makes to oversee the sale of one property and the purchase of another at the same time, also known as a concurrent closing.
Escrow closing:
An escrow closing occurs when all conditions of a real estate transaction are met and the title of the property is transferred to the buyer.
Escrow Company:
A firm that acts as a neutral third party to ensure that all conditions that the buyer, seller, and lender establish in a real estate transaction are met.
