Contributed by Doug Watson, CEO of Frontier Title
With more than five million homes sold annually in the United States, purchasing a home remains at the center of the American dream. A large percentage of these buyers will be making this major purchase for the first time, which can be an extremely stressful and overwhelming experience. Even for an experienced homebuyer, purchasing a home can be a daunting undertaking, as they are well aware of the stack of paperwork that must be completed in order to get the keys to their new home. One of the lesser-known aspects of purchasing a home is the role that title insurance plays within the closing process. Title insurance is a very important investment, so we’re sharing some information to help homebuyers better understand its role in the home buying process.
What is Title Insurance?
Title insurance protects real estate owners and lenders from property loss or damage they could experience from liens or defects in the property’s title. Unlike other insurance options that require monthly premiums, title insurance is a one-time fee paid by the buyer at the time of closing. Title insurance rates differ based on the value and location of the home being purchased. While title insurance is not mandatory, it is a strong investment.
Who is Title Insurance For?
Both homebuyers and lenders need title insurance in order to be insured against various possible title defects on a property. Prior to closing, the insurance company will run a title search on a property. This typically takes between two and three business days and statistics show that more than 33 percent of title searches result in a problem that must be resolved before closing. Liens or defects on the title can include tax liens, abstracts of judgment, child support liens or bankruptcies. A lien means another company or person has the right to keep possession of your property until your debt is repaid. Without title insurance, the new buyer would be responsible for clearing any defects that are on the property.
Closing Versus Funding
A common misconception about title insurance is the difference between closing on a home and funding a home. While they happen almost simultaneously, closing and funding are different actions and both must occur before the keys to the house are released to the buyer and a check is issued to the seller.
At closing, the seller will sign over the deed to the buyer. The buyer will sign the note, deed of trust, loan application and truth in lending documents.
During funding, the lender will authorize the release of all monies to the seller and all third parties once the funding documents are approved. The HUD sheet, an itemized form listing all service fees that must be paid out, must balance with the money coming in before any funds can be released. For example, the money coming in from the lender and your down payment must match the money that needs to be paid out to the seller, the REALTORS®, the title insurance company and other involved parties. If there is a discrepancy and the HUD doesn’t balance perfectly, funding cannot be released until the issue has been resolved.
In order for the transaction to be 100 percent complete, meaning the homebuyer will receive the keys and the seller will receive the money from their home sale, both parties must complete and sign all of the closing documents, these documents must be verified and approved by the title and lending companies, and funding has to be cleared and sent.
It is important to remember that it takes two parties to complete a home sale and in most cases, the two parties sign the closing documents at different times. While title insurance companies work with both parties to make sure the closing process is as quick and smooth as possible, it is not uncommon for delays to occur and the transaction to take place over a few hours.
What is Earnest Money?
Many homebuyers have misconceptions about the earnest money deposit required when purchasing a home. The earnest money deposit is a good faith gesture from the buyer that tells the seller you are committed to purchasing the home. This deposit is separate from the down payment, but is usually applied to the down payment or to closing costs. The buyer will provide this check to the title company before signing the final closing documents and the check will be cashed into an escrow account on that day.
Closing Tips
Many people overestimate how long it will take to sign all of the necessary documents to complete the closing process. Signing all closing documents takes, on average, 60 minutes for the buyer and 30 minutes for the seller. It is not necessary to clear your entire day, but make sure you give yourself enough time in case any unforeseen delays occur.
If you are married, make sure that your spouse is present to sign the documents, as both parties are required to be in attendance to sign off on the paperwork at closing. In Texas, even if only one person’s name is on the title, both spouses must sign off on the transaction as spouses have homestead rights, regardless if his or her name is on the title.
Make sure you bring a valid government-issued ID including a driver’s license, passport or voter ID card to prove your identity at the time of closing.
It is important to understand the basics of title insurance and the role it plays when purchasing a home so you can make an informed decision and have a successful transaction when buying or selling a home.
I have been a Realtor since 1989, and come across new situations all the time. In July, I represented the buyer in a home that was in foreclosure. The timing was tight, but we closed escrow before the sale date, however, they neglected to call off the auction, and sold the home to another buyer. My very first call was to the Title Company, and they snapped into action and had this resolved in five days.
I represented a first time buyer get through a short sale here in Southern Cal. Escrow closed in July. BUT as luck would have it, the city posted a lien on the property in May. It was not caught until the new homeowner went to the city to start his trash and sewer. I called the Title company and they quickly contacted him and took care of the lien. Another satisfied client with the quickness from the title company.
Yet another reason why using the right title company is so important when closing a real estate transaction as Karen’s and Diana’s comments also corroborate. And with the new TILA-RESPA Integrated Disclosure (TRID) taking the place of the HUD-1 on October 3rd, think dealing with a competent title company becomes even that much more important? You better believe it!
As a 46 year veteran in Illinois real estate I often see articles such as this which are not accurate in our state. Yes title insurance is important, however in Illinois the historical title report is a sellers expense. Buyers pay for a much lower priced lenders policy. The term close escrow is never used. The mechanics and sequence of a closing are the same but held on the same day with all parties in attendance including their attorneys with the flow of documentation and funding conducted by a representative of the title company. I agree with all, especially the comment about TILA-RESPA it’s extremely important to use the best title company.
I recently sold my home in Mississippi and moved out of state. I received a letter from the HOA in Mississippi saying our HOA was late and was still in my name. I looked at my title papers and find it wasn’t included in the paper work and I had not been refunded for the payment I had made for the year I sold it.
I’ve tried numerous times to contact the title company but they have refused to return my call.
My question is this; who is responsible for this not being added to the paper work considering the title company was required to do a title search? And why didn’t this show as it was on the title when I purchased the how two years prior and included in the sale.