The Big Protector: Simply put, title insurance helps protect the lender and the property investor in any property transfer.
It ensures that the investor will own the property with no past claims (encumbrances) already on it, or at least none that the buyer doesn’t know about and has agreed to allow upon the purchase of the house.
Title insurance is obtained through title companies. First-time investors, not used to the closing process, are usually baffled by the “stranger” at the closing table: the title company representative.
To explain title insurance better, let’s take a step-by-step look at how a title company operates – and what their involvement is in the closing process.
The process begins
The whole process starts when the attorney for the purchasing investor places an order for title insurance for his client. This order generally takes place after the investor receives a written mortgage commitment from a lender, or in the case of an all cash deal, upon execution by the parties of a contract of sale.
The investor’s attorney wants to protect his client from incurring any costs or fees for title work until there is a reasonable certainty that the deal will take place.
At the time of ordering, the title company is provided with a great deal of information: the names of the buyer and seller, the identity and requirements of the lender, and the names of the attorneys representing the various parties to the transaction, along with the legal description of the subject property. The title company then prepares a confirmation of the order, and sends it to the parties involved in the sale for verification purposes.
In the event there are no changes needed, the title company orders the search of the records in the county clerk’s office where the property is located.
This search is essentially a review of the deeds, mortgages, liens, legal proceedings, easements, restrictions and other encumbrances on record that may affect the title to the subject property. Basically, if there’s been an ownership problem in the past, this search will pick it up.
What a search covers
These searches often cover all activity involving the property for about 50 to 60 years or more. Title searches also include records filed with the municipality where the property is located. This is done to check any outstanding tax bills, water and/or sewer charges, special assessments, tax liens and other items which may affect the title. Records filed with the building, fire, highway and other municipal departments may be searched for records of violations, building permits and the like.
The results of these searches are then reviewed by the title company. A report is prepared and sent to all attorneys involved in the sale. This report will show the identity of the owners of record of the property, the source of the title, and a listing of mortgages, liens, easements, restrictions and encumbrances that may affect the title to the property.
The report will also contain any additional information and/or requirements that will need to be obtained and addressed prior to the closing. So, for example, if the title report comes back showing there is an outstanding (open) building permit on the property, the seller will need to complete the work required to obtain that permit and receive their Certificate of Occupancy, prior to the closing.
Obtaining clear title
Attorneys will also want to ascertain that the seller can provide “clear” title, to the extent agreed to in the contract of sale. The attorney for the seller will want to know what steps have to be taken to provide such title by the closing date. The attorney for the lender will want to be certain that the lender receives the title that is required by the mortgage commitment, as well as by the requirements of the secondary lender’s market. This stage can be marked by a great deal of discussion and negotiation by all concerned.
After the attorneys agree on which documents are to be obtained and delivered to whom, a closing date is usually set. At the closing, the required documents are delivered, the buyer becomes the new owner, the lender becomes the mortgage holder, and everyone goes home – safe and secure in their investments.
The title policy provides that the buyer is given an insurance policy that insures that title ownership has been successfully transferred, subject only to the conditions set forth in the policy. These can include items such as easements, driveway maintenance agreements and the like.
The lender is given insurance that the mortgage it holds on the property is a valid, enforceable lien against the premises, again, subject to the various items found by the title company (and not disposed of prior to the closing).
Taking the deed
The title company representative leaves the closing table with the deed and mortgage (for filing with the appropriate county clerk’s office). This representative will also leave with checks to pay any “open” items, such as back taxes for example. In addition, they will bring to the clerk’s office whatever evidence had been required earlier (to clear some of the title defects uncovered in the search and review phase of the deal).
One time premium
For the title company work and insurance policy, there is usually a one-time premium paid to the title company at the closing by the borrower, as well as certain search fees for various municipal searches which were requested or required by the various attorneys.
Finally, the closing documents, after filing and recording, are then sent to the respective attorneys for all the parties to the sale.
Complex, yet essential
Though title insurance is yet another closing cost for the property investor, it’s a cost that is absolutely essential in protecting your investment.
photos courtesy of toonpool.com, massrealestatelawblog.com, salelahome.com, rmbescrow.com, ocasturkiye.com