What is Title Insurance?

Filed in Real Estate Tidbits by on July 18, 2011 1 Comment


Colorado Title Insurance

If you have ever bought a house, you probably remember seeing an email (and later a fedex package) arriving with your title work.  If you are like most home buyers, this document may as well be written in Greek because you have no idea what any of it means.

Simply put, title companies provide title insurance and closing settlement services for buyers and sellers in a real estate transaction.  There are a lot of title companies out there and some are more reputable than others.  You can go to www.demotech.com to look at the financial ratings and performance of a particular insurance underwriter.

Title insurance protects the purchaser and the lender from defects & human error related to the property title, and insures clear title to the property for the new owner.  Unlike most other insurance policies which protect you from future occurrences, title insurance protects the buyer and lender from things that happened in the past, and not caused by any wrong doing on the buyer’s part.

So, for example, if a lien was placed on the house before the buyer closed on the house because the prior owners did not pay the roofing company for installing a new roof, the title company would be responsible for making sure that lien was taken care of.  However, if a new lien was placed on the home after the closing because the new owner didn’t pay the contractor who refinished a bathroom in the house, title would not cover this lien.

Potential Title issues

What are some other potential issues that could come up on a title report?  Unpaid real estate taxes.  Unpaid water bills.  Contractor liens.  Fraudulent deeds.  Incorrect recording of documents.  Improper liens placed on the property.   Undisclosed easements or “rights of way”.  Past covenant violations.  Previous mortgages.  Misinterpretation of wills.  And I’ve only named a handful of potential issues… the list is pretty lengthy.

What role do Title Agencies play in a real estate transaction?

Title insurance is vital for a transaction to close.  There are 2 types of title insurance- a lender’s policy & an owner’s policy.  A lender’s policy is typically paid for by the buyer in a single lump sum payment at the closing.     Most mortgage lenders will require that this policy be in place for an amount equal to the loan that the buyer is borrowing.  This policy lasts until the loan is completely repaid.  Then there is the owner’s policy, which is generally paid for by the seller.  This is to assure to the buyer that the title is free and clear.  Most title insurance companies offer a discount if both the owner’s and lender’s policy are purchased at the same title company for a specific property.  Therefore, the majority of transactions will have an owner’s and lender’s policy issued by the same title company.

Here is a general sequence of title events for a real estate transaction:

  • A contract is signed by the buyer & seller.
  • The listing agent forwards a copy of the executed contract to title company that will perform the closing.
  • The selling agent (buyer’s Realtor) brings the buyer’s earnest check to the title company and requests a receipt.  The title company holds this money in an escrow account until the closing.
  • The title company researches the chain of title, performs a judgement and name search,  and searches property records and identifies any mortgages and liens that need to be paid off.
  • The title company issues a commitment for title insurance.  This includes the premiums owed for the owners’ policy and the lender’s policy, requirements to be fulfilled prior to issuing the policy, and exceptions to coverage (covenants, mineral rights, easements, etc).
  • The buyer’s lender sends the title company information on fees from the lending side (appraisals, credit reports, flood certifications, escrow accounts, etc).
  • The title company puts together a settlement statement, which is reviewed by all parties for accuracy prior to closing.
  • At closing, the sellers sign the deed to the property over to the buyers.  Everyone signs the title company disclosures.  The buyers sign the loan documents.
  • Money is accounted for.  The loan funds for the buyers.  The buyers bring their check for the down payment and/or closing costs to the closing.  The sellers pay off their loan with proceeds from the sale (or bring money to the closing table if they owe more than they receive from the sale).
  • The title company pays the underwriter for the insurance policy, gives a check to the seller (if they made money from sale) and disperses the realtors’ commission checks.
  • The buyers get the keys to their new house!
  • The title company records the deed to the property at the county.
  • Title policies are issued, signed, and mailed to the buyer and lender.

Tips on selecting a title company

  • Research title insurance policy costs and related closing costs as they can vary greatly from one title company to the next.
  • When writing a contract for a buyer, ALWAYS request a policy with extended coverage, which deletes the first several standard exceptions on a title report.  This generally only adds about an extra $50 to the title fees, and is well worth it for the added protection.
  • Go to Demotech, Inc to look at the financial ratings and performance of a particular insurance underwriter.
  • Always question title exceptions that don’t reference a specific book and page or reception number, as general exceptions may negate full coverage.

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Comments (1)

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  1. Hi there, the whole thing is going sound here and ofcourse
    every one is sharing information, that’s truly fine, keep up writing.

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