Homeownership month is around the corner which brings our focus to buyers and sellers going through the many real estate transactions that happen every day. It’s a complex process that leaves many people confused by the end, yet fueled by the anticipation of receiving the keys to their home, they make it to the finish line.
One major area that many homebuyers and sellers feel unfamiliar with is the role of title agents and title insurance. A title agent, and the team they work with, complete an extremely important part of a real estate transaction. They’re the guardian angels of homeownership in many ways.
The very first title company started in 1876 in Philadephia, Pennsylvania with the mission to protect “the purchase of real estate and mortgages against losses from defective title, liens, and encumbrances.” A notorious court case, Watson vs. Muirhead, exposed the vulnerability many buyers faced if a title records search was conducted improperly or if the wrong legal opinion on the validity of a lien is given.
Title insurance companies offer assurance that they will stand by their title searches and opinions should a problem come up later. They do important real estate property research before issuing a title policy for lenders and homebuyers.
Here’s a breakdown of what a title insurance company does before, during, and after a real estate closing.
What Does It Mean to Hold Title?
To “hold title” means that a person legally owns something. It could be personal property like a car or real property like a house. Sometimes the words deed and title may be used interchangeably, but they aren’t the same thing.
The title is the concept of ownership while the deed is the document recorded in the public record to prove who owns the property and has a right to sell it.
What Is Title Insurance?
A title commitment is issued as a promise to provide a title insurance policy if certain requirements are met to resolve any of the issues found during the title search. The commitment acts as the roadmap for the title company to ensure liens are cleared before or at closing with the funds of the sale.
Unlike home insurance, it doesn’t protect against future calamity on the property itself. Instead, it provides coverage for past issues that went undiscovered before purchasing the property.
Examples of common defects include an undisclosed lien, a dispute over boundary lines, fraudulent or illegal deeds, omitted heirs, and errors in the public record. Without title insurance, homeowners are left to settle these disputes in court on their own. They also risk losing their home if someone else can prove rightful ownership.
There are two types of title insurance:
- The Lender’s Policy
- The Homeowner’s Policy
The lender’s policy protects the bank or mortgage company that’s providing the loan for the home purchase. It will cover the amount borrowed in case of title defects and is mandatory to receive financing. The homeowner’s policy, on the other hand, protects the homebuyer’s equity or interest in the property.
Related Reading: Important Questions to Ask About Title Insurance
Pre-closing: Establishing the Chain of Title
The title examiner is one of the essential roles in a title company. This professional uses various indexing and recording systems, like the public land records system, title plants, and the Mortgage Electronic Registration System (MERS) to search for chain of title documents. These documents help the title examiner determine:
- If the seller owns the property
- If there are any problems encumbering the title that must be resolved before closing
Some of the information sought out in a title search:
This will need to be paid off with the funds from the sale before the title can be transferred to the new owner. If the previous owner paid off their loan, a satisfaction of mortgage, release of mortgage, deed of reconveyance, or some other document will be found showing the original mortgage was paid in full.
Other Loan Products
In addition to a first mortgage, some homeowners may take out a second mortgage, home equity loan, a home equity line of credit, or other types of home improvement loans. These loans will be filed as liens in the land record. Like a first mortgage, these loans must be paid off and a corresponding release recorded.
Judgments or Other Liens
When a homeowner doesn’t pay their taxes, utility bills, or other debts, creditors have a right to place a lien against the property for nonpayment. The Internal Revenue Services (IRS) and other taxing authorities with liens filed on a property will be paid with the proceeds from the sale.
Community Association Assessments
If the property is governed by a community association like an HOA, the title examiner will also reference association documents to determine if the current owner is up to date with dues, there are no pending violations, and no HOA liens.
Depending on the location and type of property, there may be restrictions on who can own the property or how they may use the property. A common example of a restriction would age restrictive communities.
Some land comes with easements, which are agreements to allow certain individuals access to parts of the land for a specific purpose. Utility easements or access easements are typical examples.
If the property is currently used as a rental, the tenants may have certain rights based on prior agreements. Depending on the terms of the lease, the new owner may be required to honor it.
Establishing Boundaries With a Property Survey
In addition to determining who owns the property, the title searcher is usually required to determine what the property includes. A land survey is conducted to establish official boundaries and discover any possible encroachments on the property.
Sometimes, a title insurance policy may have an exception to these boundary problems if a survey isn’t conducted.
An encroachment is when a building, fence, or other structure is built or partially built on the property of another. If there’s an encroachment or easement that may cause a problem in the future, the title company must take this information into consideration when issuing the title insurance policy.
An endorsement to insure these kinds of boundary issues will likely require an in-depth boundary survey, which can take time to complete and delay the closing.
Related Reading: What Kind of Land Survey Do I Need?
A title report or abstract of title shows all the ownership history of the property up for sale. It’s essentially a timeline of when the property was sold, inherited, or involved in any court litigations like foreclosure or bankruptcy and tax auctions.
Based on this snapshot, the title company writes a title opinion stating if they believe the seller has a valid right to sell and if they are willing to provide title insurance. However, if any issues are discovered during the inspection and research period, they may need to be resolved before the final policy is issued.
Coordinating the Closing
In addition to the title search, the title company also plays a key role in coordinating the closing. Homebuyers and sellers may be invited to the title company’s office or a loan signing agent may be sent to sign and notarize the appropriate closing documents.
Some states may require the presence of an attorney at the closing, sometimes called the settlement. During this time, the title agent or agent attorney acts as a neutral third party. They do not represent the buyer or seller, and they don’t provide legal advice when reviewing the closing documents. Their role is to facilitate the settlement and finalize the new deed and title transfer.
If buyers or sellers have specific legal questions when reviewing and signing their closing documents, they should retain a real estate attorney.
Post-Closing: Disbursement of Funds
Once the closing is finished, the title company ensures the proper funds are disbursed to the seller, the lender, and any other parties with a financial interest.
These funds are held in an escrow account, which is usually managed by an escrow agent. There’s usually one set up to pay the seller and one set up to pay the lender. The latter wraps up the mortgage payments, taxes, and homeowner’s insurance into one monthly payment. The lender or servicer usually calculates the payment to add a cushion in the event the borrower falls behind or taxes increase more than expected.
The title company also ensures that post-closing packages are delivered to each party and all instruments listed in the commitment are recorded in the public record.
Related Reading: Is Release Tracking Part of Your Post-closing Process?
PropLogix Provides Title Support Services
PropLogix isn’t a title company. We work directly with title companies, real estate law firms, mortgage companies, and other real estate professionals to obtain the property research they need to do their jobs.
Some of our services include municipal lien searches, title reports, release tracking, and tax certificates. Many of these services can be ordered without navigating away from your title production software with our integrations.
If you’re part of a title company or law firm looking for support, learn more by watching this demo of our ordering platform and get customized pricing.