Title Insurance 101 - Bay National Title Company · • Introduction • ... We created this eBook to answer those questions and many others and to help realtors, home buyers, and

Title Insurance 101: A Guide for Realtors,

Home Buyers, & Lenders

Don’t Think You Own. Be Sure. www.BNTC.comCallusat727.449.8733

TABLE OF CONTENTS

•  Introduction

•  The History Behind Title Insurance in the United States

•  Why Do You Need Title Insurance?

•  What Is Lender’s Title Insurance?

•  What Is Owner’s Title Insurance?

•  What Is a Title Commitment and Why Is It Important?

•  What Does a Title Insurance Underwriter Do?

•  How Much Does Title Insurance Cost?

•  What Are Title Policy Endorsements?

•  What Are Title Insurance Vesting Issues?

•  What Should You Look for in a Title Insurance Company?

•  What Should You Expect From the Title Policy Process?


INTRODUCTION

One of the most important steps to take before closing the deal on the purchase of a new home is to obtain title insurance. But what is it? Why do you need it? And where can you get it? We created this eBook to answer those questions and many others and to help realtors, home buyers, and mortgage lenders better understand the ins and outs of title insurance.


In layperson’s terms, a title to a piece of property provides evidence of lawful ownership. And title insurance is a type of policy that insures a property owner or mortgage lender against loss by reason of defects in the title to a piece of real estate. But up until the 1870s in the United States, there was no title insurance. It was the home buyer’s full responsibility to determine if a title was valid. Proving so was an incredibly difficult and time-consuming endeavor, as it was difficult to obtain access to property records. The issue came to a head in 1868 when a Pennsylvania conveyancer (a lawyer who specializes in buying and selling property), Charles Muirhead, found the title on a piece of property that one of his clients, Mark Watson, was planning to purchase. Although there were liens on the property, Muirhead did not report them to Watson, and based on the supposedly clean title, Watson purchased the property. Upon finding out about the liens, Watson sued Muirhead to recover his losses, but the Pennsylvania Supreme Court ruled that there was no negligence on Muirhead’s part and Watson had absolutely no recourse. This put into motion an act by the Pennsylvania Legislature “to provide for the incorporation and regulation of title insurance companies.” As a result, the first title company in the United States was established in Philadelphia in 1876, and title insurance was born.

THE HISTORY BEHIND TITLE INSURANCE IN THE UNITED STATES


WHY DO YOU NEED TITLE INSURANCE?

Watson v. Muirhead is a textbook case as to why every home buyer and lender needs to have title insurance. Even though it’s much easier to track down records these days, you absolutely want to be protected against property loss or damage that could be caused as the result of a lien, encumbrance, or defect in a title. •  Lien—a public notice that money is owed on the

home.

•  Encumbrance—a registered interest on the home from someone who is not the owner.

•  Defect—a serious error, omission, or other complication related to the ownership of the home.

It’s important to note that each title insurance policy has its own terms, conditions, and exclusions. Unlike other insurance policies, such as car insurance, title insurance protects the home buyer and lender from past events (not future events), which are touched on above.

http://www.bntc.com/everything-home-buyers-need-to-know-about-title-insurance/

http://www.bntc.com/everything-home-buyers-need-to-know-about-title-insurance/


In addition, the insurance premium is paid just once, at closing, when the real estate transaction has been finalized. The coverage is good for as long as the home buyer or their heirs have an interest in the home. When the home buyer signs the purchase agreement for the home, the escrow, or closing, agent (the individual who facilitates the transfer of the property) will find an appropriate title insurer. As mentioned, both the lender and home buyer need to have title insurance on the home. The seller typically pays for the title search (see below) and home buyer’s policy, while the home buyer typically pays for the lender’s policy; though it depends on location. For example, in 22 of Florida’s 67 counties, the home buyer pays for both policies. However, payment of title insurance is open for negotiation and is always part of closing costs on the home.

http://www.bntc.com/buyer-or-seller-who-pays-for-closing-costs-and-title-insurance/

http://www.bntc.com/buyer-or-seller-who-pays-for-closing-costs-and-title-insurance/


Lender’s title insurance, also known as a mortgagee policy, covers the lender for the costs of its legal defense and

protects the lender if there is a failure of title or if the status (priority) of their lien is different than expected. Lender’s

title insurance protects the lender up to the amount of their mortgage. In addition, it protects the lender from title

issues that may not have been found in the public records, such as documents executed via fraud or forgery. Typically,

the home buyer can’t get a mortgage loan unless they purchase lender’s title insurance for the lender.

WHAT IS LENDER’S TITLE INSURANCE?


Owner’s title insurance is typically issued on the purchase price of a property. It protects the owner from title defects

that result when the ownership of the property is challenged. While the buyer may be forced to purchase a title

insurance policy to protect their lender, their equity is NOT protected unless they purchase owner’s title insurance.

Owner’s title insurance protects the costs to clear the title of the discovered defect(s) and protects any legal fees the

owner may incur to protect their interests in the property.

WHAT IS OWNER’S TITLE INSURANCE?


WHAT IS A TITLE COMMITMENT AND WHY IS IT IMPORTANT?

Once the parties agree to use a title insurance company, that company will make a promise to issue title insurance for the home after closing. This promise is known as the title commitment, and it’s composed of the same terms, conditions, and exclusions that will appear in the insurance policy. As part of the title commitment, the home buyer receives a title binder of information on the home. This is the information that the insurance underwriter (mentioned in the next section) collects after conducting a title search to review the home’s public records. This information includes:

•  past bankruptcy filings

•  court judgments

•  tax records,

•  divorce decrees

•  deeds

•  trusts

•  wills

The report informs all parties involved of any possible issues, or clouds, before moving forward with the sale. When the home buyer has the title commitment in hand, it’s critical for them or their attorney to review it so that they know about any exceptions found during the review of the public records. For example, the home buyer may not want to purchase a home if an easement has been granted for a utility pole on the property they’re interested in buying. If this exception was listed on the home buyer’s title insurance policy and the home buyer failed to see it, it’s not the title insurance company’s responsibility to help them out.


Now, there could be certain exceptions listed on the title commitment that won’t interfere with the home buyer’s use of

the home. For example, a utility pole certainly might, but including an exception for the electric company to read your

meter would not. In addition, if the home buyer has any plans to add to the house or build another structure on the

property, they will want to know in advance whether that’s permitted.

Finally, there may be an issue that was discovered during the survey of the property. For example, the need to remove

a fence that was mistakenly built on your neighbor’s property. This would also be listed on the title commitment, and

it’s the seller’s responsibility to have it moved or get an easement from the neighbor to keep it where it is. Regardless,

if the home buyer does not see this in the title commitment, they will be responsible for addressing the fence issue.

Fortunately, most real estate purchase agreements include a provision that states that the purchase of the home is

subject to the home buyer’s review and acceptance of the title commitment. Consequently, if there are any

unacceptable exceptions to the home buyer, they can request that the seller take care of them or the home buyer can

walk away. For example, if there’s a lien on the home, the escrow company will clear it and deduct it from the net

amount of the sale.

http://www.bntc.com/seller-responsibilities-buying-home/


WHAT DOES A TITLE INSURANCE UNDERWRITER DO? As touched on in the previous section, an insurance underwriter is responsible for handling the title search, ensuring that the current owner has full ownership and rights to the home he/she is selling. A talented and dedicated insurance underwriter can make all the difference in determining whether a title is clean. The individual needs to be an expert researcher in order to find any issues that could potentially impede the sale of the home. Some of the common issues underwriters look for are: •  Property or judgment liens attached to the home

•  Easement rights and encroachments

•  Missing heirs, undiscovered wills, and rights of

third parties

•  Pending legal action

•  Unpaid taxes

•  Errors in public records

http://www.bntc.com/what-does-a-title-insurance-underwriter-do/

http://www.bntc.com/what-does-a-title-insurance-underwriter-do/


A skilled underwriter will scour public records looking

for this information. In addition, they often have

thorough knowledge of real estate law, which helps

them solve complicated issues that affect the sale of

the home. When reviewing the preliminary title report,

it’s imperative to make sure that the seller has the legal

right to sell the house and that all debts tied to it will

be paid. Similarly, if there are easement rights or other

zoning ordinances, they need to be resolved prior to

the sale of the home, unless the home buyer is OK

with them.


HOW MUCH DOES TITLE INSURANCE COST?

Title insurance premiums typically cost around $1,000; though they can range from $175 to more than $2,000

depending on the state. Policies cover all of the work done ahead of time by the title insurance company, such as the

title search and resolving most title problems, and any legal fees and loss of equity that could occur after the sale due

to a title dispute.

That said, the policy premium varies from state to state and can also depend on the price of the home, property type

and location, loan amount, amount of coverage, and transaction type. For example, in Florida, part of the premium

rate is standardized by the state’s Office of Insurance Regulation and is determined by purchase price (This is known

as the promulgated rate.):

•  Up to $100,000 = $5.75 per thousand (for example, $100,000 = $575.00)

•  $100,000 to $1,000,000 = $5.00 per thousand (for example, $200,000 = $1,075.00)


That said, if the seller or buyer has a previously issued owner’s title insurance policy (less than three years old), they

could qualify for a Reissue Rate. Before closing, they have to present the prior policy to the title insurance company

to earn the discounted rate, which is $3.30 per thousand up to $100,000 and $3.00 per thousand from $100,000

to $1,000,000.

In Florida, in addition to the promulgated rate, title insurance premiums also include title service fees, such as the

previously mentioned title search and examination fees. A detailed list of these fees is included in the preliminary

closing statement.


WHAT ARE TITLE POLICY ENDORSEMENTS?

On top of the standard title insurance policy, home buyers can expand or modify their coverage by adding title policy endorsements. These are added to give the home buyer coverage for additional matters that are not covered by the standard owners policy for example, mobile home coverage, environmental lien protection, covenants and conditions coverage, and other matters that could affect the future marketability of the title. There are close to 100 title endorsements, many of which are determined by the home type and location, and type of loan. Depending on which endorsements the home buyer chooses, they could pay between 15% and 50% on top of the standard title insurance premium. However, as with the standard policy, the home buyer will only pay for endorsements once, and they provide coverage as long as the home buyer or their heirs have an interest in the property.

http://www.bntc.com/what-is-a-title-policy-endorsement/

http://www.bntc.com/what-is-a-title-policy-endorsement/


WHAT ARE TITLE INSURANCE VESTING ISSUES?

Simply put, a vesting is a way to hold title to property,

so it’s important for the home buyer(s) to determine

whether it will be held as a sole-ownership, co-

ownership, joint tenancy, tenancy in common, or

community property, for example.

Essentially, it specifies who is responsible for the

benefits, costs, and transferability of the property.

Each of these forms of title also has inheritance and tax

implications, so it’s important to contact an attorney or

estate planner before deciding on how the title should

be held.

http://www.bntc.com/common-title-insurance-vesting-issues-lenders-need-know/


WHAT SHOULD YOU LOOK FOR IN A TITLE INSURANCE COMPANY?

Oftentimes real estate agents will refer title insurance companies to their clients, but consumers should do their due

diligence to make sure they select the right company that can meet all of their needs. It’s prohibited by federal law for

any involved party to require the home buyer/seller to use a specific title insurance company.

If you’re in the market for a title insurance company, you want to look beyond price and consider the title insurance

company’s reputation, along with all the services they offer.

Here are some questions to ask when considering a title insurance company:

•  Who Is Your Client? Of course, you want them to say you, but that may not always be the case if your real estate

agent or lender referred them to you. It’s in your best interest to make sure the title insurance company doesn’t

have a conflict of interest. For example, they could be owned by the real estate agency in which case their priority is

most likely closing the sale of the home as quickly as possible so that they can help the agency make money. As the

home buyer, you want to work with someone who is going to help address any issues that could stand in the way of

a clear title.


•  How Comprehensive Are Your Title Searches

and Do You Disclose Everything to the Home

Buyer? Again, you want to work with a title

insurance company that has your best interest in

mind, so it’s vital to make sure they leave no stone

unturned. After all, one in four title commitments

has some type of cloud on it at the time of

commitment. Sometimes title insurance

companies will simply provide “broad exceptions”

on the report and not specify what the public

records revealed. As a home buyer, you should

always review the report carefully and take the

time to ask questions if anything is not clear. After

all, once you close on the house, you will have no

recourse if a lien, encumbrance, or defect comes

to light after the fact. You want to work with a title

insurance company that will take the time to

discuss the results with you thoroughly.


•  Can I Trust You With My Money? Yes, there are dishonest and incompetent title insurance companies out there. Make sure you do your homework, and if you have any concerns about how they protect your funds, give them a call. They should be forthcoming in detailing the procedures, internal controls, and segregation of duties they’ve established to give you peace of mind that your funds are in good hands.

•  What Are Your Fees and Charges? In 41 of the 50 U.S. states, title insurance premiums are regulated by state law, and are determined by a number of factors, including purchase price, home type and location, loan amount, amount of coverage, transaction type, and title service fees. As mentioned, you can also extend your coverage by adding title policy endorsements.

Regardless of the type of coverage you choose, you should ask for a detailed list of the title insurance company’s fees, so you won’t be surprised later. If their rates are significantly lower than the standard market rates, that could signify that they are inexperienced, or more worrisome that they aren’t providing industry standard title and closing services. Regardless of which title insurance company you select, you want to make sure that they place your needs first. They should communicate clearly with you, work efficiently, and provide you with the peace of mind that you would expect from an experienced and professional company.


WHAT SHOULD YOU EXPECT FROM THE TITLE POLICY PROCESS?

Once the seller accepts your offer, closing on your house will typically take place within 30 to 90 days, if all goes smoothly. Your title insurance company plays a key role in the closing process. One of their escrow agents will typically serve as an impartial party for the home buyer, seller, and lender, which entails carrying out the title search, issuing the insurance policies, facilitating closing, and recording and filing all paperwork. The first thing the escrow agent will do is make sure the escrow agreement is accurate and complete, and then place the home buyer’s deposit into an escrow account, where it will remain until closing. At this time, they will open a title order and request:

•  the identification of the property and the parties involved

•  the purchase price

•  lender information

•  existing mortgages

•  a signed copy of the purchase agreement


They will also gather documentation for the file, including: •  tax information

•  homeowner/maintenance fees

•  inspection reports

•  loan payoff statements

•  hazard and other insurances

Concurrently, a title search is ordered, which is carried out by an insurance underwriter who will review the home’s County records. It typically takes about two weeks for the preliminary title report to be prepared; though it can take longer, depending on the property and transaction type. If the title is clear, the title insurance company can move forward and issue a title commitment to both the lender and home buyer. However, if there are clouds on the title, it could take a month or so to resolve them, depending on the severity. Or if there’s a really big issue, such as someone else claiming ownership of the home, the home buyer may want to simply walk away. When the title is clear, the home buyer’s mortgage lender will provide a closing disclosure for review at least three days prior to closing. Also during this time, the escrow agent will review the legal and loan documents, prepare all the paperwork for closing, and schedule the closing. Finally, the copies of the deed, lender instructions, bill of sale, and other closing documents are sent to all parties for approval. The title insurance then goes into effect after closing.

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Title Insurance 101 - Bay National Title Company · • Introduction • ... We created this eBook to answer those questions and many others and to help realtors, home buyers, and

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