The process of buying a home is complicated. Consumers can become confused and frustrated with the mounds of paperwork and documents to sign. Fees show up at closing that can sometimes surprise the buyer however, as your buyers agent we will be there to assist you through every step of the process and handle all of the details involved with your purchase to ensure your transaction is both successful and smooth.
Title insurance is one of those charges little understood by homebuyers, who often see it as just another fee they have to pay to buy a home. In this post we hope to help you understand the value of title insurance and the protections it provides.
What is Title Insurance?
Title insurance protects against real estate owners and lenders from problems affecting the title to a home, which for many is their most valuable asset. Homebuyers are protected from ownership issues by purchasing an Owner’s Policy of title insurance, which ensures that the title to their property is clear of liens or encumbrances, such as unpaid mortgages, property taxes or mechanics liens, to name a few. Additionally, title professionals will look for anything that could limit the use of the property, such as utility easements. When a title professional finds an issue, they work to resolve it—typically without you even knowing about it.
The majority of the one-time fee paid for an Owner’s Policy covers the cost for professionals with local expertise to discover, identify and repair problems caused by title issues that occurred in the past. Because of these preventive measures, title insurance is fundamentally different from other forms of insurance, which charge annual premiums to provide insurance protection for future events. This also means that title insurance has lower loss rates than other forms of insurance. In title insurance, a claim is serious, and a loss means your client’s homeownership is threatened. Therefore, low loss rates are good for consumers. The curative work performed by title agents minimizes the fear, disruption and distress that title claims have on homeowners. An Owner’s Policy provides protection for as long as they or their heirs own the property. Having an Owner’s Policy means that the cost of defense and legal fees are paid by the title insurer for the homeowner.
Here’s an example of how an Owner’s Policy can protect a homeowner. Say you recently purchased a new home from a builder. Unfortunately, the builder failed to pay the roofer. Wanting to be paid, the roofer filed a mechanic’s lien against the property. Without a title search alerting the title company and in turn you to this lien, and an Owner’s Policy protecting you, you would become responsible for paying this debt—meaning you’d be paying the roofer!
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.
When purchasing real estate, consumers are free to select their own title professional or company – in Ohio is it the Seller that selects the title company however, buyers always have the option of selecting their own title company to handle their side of the transaction.
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.
Title insurance rates are regulated by state insurance departments. In addition, title insurance and real estate closing practices are regulated by the Consumer Financial Protection Bureau (CFPB). Keep in mind that title insurance industry practices vary due to differences in state laws and local real estate customs. Who pays for the Owner’s Policy varies from state to state and sometimes even within a state.
FOR ADDITIONAL INFORMATION ON TITLE INSURANCE, RATES AND FEES, OR OTHER TITLE RELATED QUESTIONS PLEASE CONTACT ATLAS TITLE SOLUTIONS AT 614.245.0636