Title 101

1. Why You Need Title Insurance
2. Closing Process
3. Closing Costs Explained
4. What Is ALTA?

Why You Need Title Insurance

When you purchase your home, how can you be sure that there are no problems with the home’s title and that the seller really owns the property? Problems with the title can limit your use and enjoyment of the property, as well as bring financial loss. That is what a title search and title insurance are for.

The Title Search

After your sales contract has been accepted, a title professional will search the public records to look for any problems with the home’s title. This search typically involves a review of land records going back many years. More than 1/3 of all title searches reveal a title problem that title professionals fix before you go to closing. For instance, a previous owner may have had minor construction done on the property, but never fully paid the contractor. Or the previous owner may have failed to pay local or state taxes (See below for some other common title problems). Title professionals seek to resolve problems like these before you go to closing. What happens if a problem arises after you move in? Read on.

The Owner’s Title Policy

Sometimes title problems occur that could not be found in the public records or are inadvertently missed in the title search process. To help protect you in these events, it is recommended that you obtain an Owner’s Policy of Title Insurance to insure you against the most unforeseen problems.

Owner’s Title Insurance, called an Owner’s Policy, is usually issued in the amount of the real estate purchase. It is purchased for a one-time fee at closing and lasts for as long as you or your heirs have an interest in the property. Only an Owner’s Policy fully protects the buyer should a covered title problem arise with the title that was not found during the title search. Possible hidden title problems can include:

•Errors or omissions in deeds
•Mistakes in examining records
•Forgery
•Undisclosed heirs

An Owner’s Policy provides assurance that your title company will stand behind you — monetarily and with legal defense if needed — if a covered title problem arises after you buy your home. The bottom line is that your title company will be there to help pay valid claims and cover the costs of defending an attack on your title. Receiving an Owner’s Policy isn’t always an automatic part of the closing process, and is paid for by different people in different parts of the country. Be sure you request an Owner’s Policy and ask how it is paid for where you live. No matter who pays for the Owner’s Policy, the fee is a one-time fee paid at closing. The Owner’s Policy protects you for as long as you or your heirs have an interest in the property.

You also have the option of purchasing a policy with expanded coverage. It’s called the Homeowner’s Policy and it covers more things than the Owner’s Policy. Ask your local title company for an explanation of the expanded Homeowner’s Policy so you can decide which policy is the best one for you.

The Loan Policy

There are two types of title insurance: Owner’s title insurance, as mentioned above, and Lenders title insurance, also called a Loan Policy. Most lenders usually require a Loan Policy when they issue you a loan. The Loan Policy is usually based on the dollar amount of your loan. It only protects the lender’s interests in the property should a problem with the title arise. It does not protect the buyer. The policy amount decreases each year and eventually disappears as the loan is paid off.

Prices vary from state to state. Be sure to ask your settlement or title company about pricing and whether the Loan Policy and Owner’s Policy are sold separately or together.

Common Title Problems

Here are three short stories on some common title problems:

Fraud & Forgery

Those involved in real estate fraud and forgery can be clever and persistent, which can spell trouble for your home purchase.

In a western state, an innocent buyer purchased an attractive home site through a realty company, accepting a notarized deed from the seller. Then another couple, the true owners of the property — who lived in another locale — suddenly appeared and initiated legal action to prove their interest in the real estate was valid. Under the Owner’s Title Insurance Policy of the innocent buyer, bought for a one-time fee at closing, the title company provided a money settlement to protect against financial loss. As it turned out, the forger spent time in advance at the local court house, searching the public records to locate property with out-of-town owners who had been in possession for an extended period of time. The individual involved then forged and recorded a deed to a fictitious person and assumed the identity of that person before listing the property for sale to an innocent purchaser, handling most contacts through an answering service. Also, the identity of the notary appearing on deeds was fictitious as well.

Fraud and forgery are examples of hidden title hazards that can remain undetected until after a closing despite the most careful precautions. Although emphasizing risk elimination, an Owner’s Policy protects you financially through negotiation by the insurer with third-parties, payment for defending against an attack on the title as insured, and payment of valid claims.

Conflicting Wills

Conflicts over a will from a deceased former owner may suggest a study topic for law school but, the subject can take on a reality dimension and all too quickly your home ownership is at stake.

After purchasing a residence, the new owner was startled when a brother of the seller claimed an ownership interest and sought a substantial amount of money as his share. It seemed that their late mother had given the house to the son making the challenge, who placed the deed in his drawer without recording it at the court house. Some 20 years later, after the death of the mother, the deed was discovered and then filed. Permission was granted in probate court to remove the property from the late mother’s estate, and the brother to whom the residence initially was given sold the house. But the other brother appealed the probate court decision, claiming their mother really did not intend to give the house to his sibling. Ultimately, the appeal was upheld and the new owner faced a significant financial loss. Since the new owner had acquired an Owner’s Policy of Title Insurance upon purchasing the real estate, the title company paid the claim, along with an additional amount in legal fees incurred during the defense.

Missing Heirs

When buying a home, it’s important to remember what you don’t know can cost you.

A couple purchased a residence from a widow and her daughter, the only known heirs of the husband and father who died without leaving a will.

Soon after the sale, a man appeared – claiming he was the son of the late owner by a former marriage. As it turned out, he indeed was the son of the deceased man. This legal heir disapproved of his father’s remarriage and had vanished when the wedding took place. Nonetheless, the son was entitled to a share of the value of the home, which meant an expensive problem for the unwary couple purchasing the property.

Although the absence of a will hindered discovery of the missing heir in a title search of the public records, an Owner’s Policy of Title Insurance issued for a one-time fee at the time of the real estate transaction would have financially protected the couple from the claim by the missing heir. For a one-time charge at closing, an Owner’s Policy will safeguard against problems including those even an exhaustive search will not reveal.

An Owner’s Policy is necessary to fully protect a home buyer. Lender’s title insurance, which is usually required by the mortgage lender, serves as protection only for the lending institution.

I’m refinancing, why do I need title insurance?

When you refinance you are obtaining a new loan, even if you stay with your original lender. Your lender will usually require a new title search and Loan Policy to protect their investment in the property. You will not need to purchase a new Owner’s Policy; the one you bought at closing is good for as long as you and your heirs have an interest in the property.

Even if you recently purchased or refinanced your home, there are some problems that could arise with the title. For instance, you might have incurred a mechanics lien from a contractor who claims he/she has not been paid. Or you might have a judgment placed on your house due to unpaid taxes, homeowner dues, or child support for instance. The lender needs reassurance that the title to the property they are financing is clear.

Ask if you qualify for a “refinance” rate, sometimes called a “reissue” rate. These rates are not available in every state, and you might have to meet some criteria to be eligible, so be sure to ask.

I’m buying a newly built home, do I need title insurance?

Construction of a new home raises special title problems for the lender and owner. You may think you are the first owner when constructing a home on a purchased lot. However, there were most likely many prior owners of the unimproved land. A title search will uncover any existing liens and a survey will determine the boundaries of the property being purchased. In addition, a builder may have failed to pay subcontractors and suppliers. This could result in the subcontractor or supplier placing a lien on your property. Again, lenders want to be sure the property has clear title, and they are insuring the correct property. Purchasing an Owner’s Policy will protect you against these potential problems and pay for any legal fees involved in defending a claim.

How To File A Claim

An owner’s policy of title insurance is intended to provide the homeowner with peace of mind about their legal rights to real property.

Whenever the homeowner has any question or concern about his or her rights, he or she should promptly notify the title insurance company whose name appears on his title policy. The title policy includes instructions for contacting the title insurer, usually at the end of the “Conditions and Stipulations” section within the policy.

If you are unable to locate your policy, or are unsure whether you purchased a policy, you should contact the title company, title agent or attorney that handled your purchase and inquire about your coverage. You can determine if you have title insurance coverage by reviewing the TRID Closing Disclosure provided at the closing of your purchase, which itemizes receipts and disbursements by the closing officer. For example, charges for an owner’s policy of title insurance are listed in "Section H" of the TRID Closing Disclosure. Contact information for the title insurer may also be found in telephone directories, on the internet, or by inquiry to your state department of insurance.

When giving notice of a potential claim to the title insurer, you should include the property address, a brief statement of the question or matter that concerns you, copies of any claims documents received, and a copy of your owner’s policy (if available).

Remember, the broad coverage of title insurance includes protection against frivolous claims, or “clouds” on title that may not present an immediate problem. So it’s best to contact the title insurer promptly, as soon as you have any question or concern about your legal rights with insured land.

Closing Process

Let’s start at the very beginning — what does “closing,” “settlement,” or “closing escrow” on your house mean?

Closing – or settlement as it is known in some parts of the country — is a term used for the point in time at which the title to the property is transferred to the buyer and, generally, a mortgage (or “deed of trust”) is given by the buyer/borrower to the lender.

Buying a house is an exciting time and the more you know about the process, the more relaxed you’ll be going through it. Keep reading, and we’ll walk you through what the closing process really means.

Some information about the costs associated with closing on your home should be provided to you before you put a contract on a house. If you are obtaining a loan to purchase the property, your lender has three days from the time of the loan application to provide you with a TRID Loan Estimate showing your loan costs so there are no surprises about costs. Within those three days you should also receive a copy of the booklet, “Buying Your Home,” which outlines the settlement process. If these two things do not occur, talk to your lender.

Once the seller accepts your sales contract, the countdown to closing begins. Timing is essential to make sure all the ingredients for a successful closing are in place for your arrival. You can shop around to select a settlement agent to prepare the documents for your closing, or you can rely on a recommendation from your real estate agent or lender. In some parts of the country, the settlement agent is an attorney, title company, or escrow company. Once a settlement agent has been selected, he or she will handle the closing process from there. If you have given the seller an earnest money deposit, the escrow agent, settlement agent, or real estate broker (this varies based on where you live), will see that it is promptly deposited into an escrow account where the funds are held until the time of closing.

Next, the settlement agent will request preliminary title work. A title professional will search and examine the public records for information related to your home’s title. This provides warnings of title flaws that must be dealt with before the property can change hands. For instance, the previous owner may have failed to pay local or state taxes. Or there may be an outstanding mortgage or judgement on the property. Title professionals work hard to see that such obligations are dealt with and resolve any issues they find well before you go to closing, if possible. If the sales contract calls for a prior mortgage to be paid off, the settlement agent will order payoff figures from the existing lender. If the buyer is assuming the loan, the settlement agent handles that as well. He/she, if directed to do so, also may order property inspections and termite reports. If it is customary in your area, the settlement agent may order a survey.

Finally the Lender with the assistance of the settlement agent is ready to prepare the TRID Closing Disclosure. The CD, as it is referred to, outlines all of the costs for both the buyer and seller associated with the closing..

On closing day, the property will be transferred from the seller to the buyer. In most parts of the country, you will sign a number of documents that will be explained by your settlement agent. Check with your settlement agent for more details on how the closing is conducted in your area. Once all of the signing is done, the house is yours! Congratulations on achieving the American Dream!

You should be generally aware that the behind-the-scenes process continues after the closing. The settlement agent still must forward payment to any prior lender, pay all the other parties who performed services in connection with your closing, pay out any net funds to the seller, and order a final search of the title to your new home before finally recording all the documents needed legally to complete your purchase. But you don’t have to be involved in any of this. Your settlement agent takes care of these post-closing details!

Closing Costs Explained

Closing your home should be exciting, and once you understand the process and how it works, it can be.

Here you will find a list of costs commonly associated with closing on a home. Fees may vary depending on where you live, so be sure to talk to your lender, real estate agent, and settlement company for more specific information.

All closing costs must be listed on your TRID Closing Disclosure, a document that is required to be filled out and sent to you 3 days prior to finalizing the purchase of your home.

What are My Closing Costs?

In addition to the sales price of the home, there are a variety of costs associated with finalizing the transaction. Click on any of these links below for more information on these costs:

•Real Estate Broker Commission/Fees – Section H
•Loan Fees – Direct Loan Costs – Section A
•Services Borrower Did Not Shop For – Section B
•Items Required by the Lender to be paid in advance (a/k/a “Prepaids”) – Section F
•Escrows/Impounds/Reserves – Section G
•Title and Closing Charges – Section B or C
•Recording/Government Filing Fees – Section E
•Other, Miscellaneous Charges – Section H
•Harmful Fees That Could Appear on the TRID Closing Disclosure 

Real Estate Broker Commission/Fees (Section H)

If you use a real estate agent to help you in buying your home, the cost of the agent’s services can be paid in one of two ways. Generally, the seller pays for all agents in a transaction in an amount usually stated as a percentage of the sales price. While this amount will be deducted, along with other seller-paid closing costs, from any amount the seller might otherwise be paid and is usually stated on the TRID Closing Disclosure, this will not be your charge. Increasingly, buyers in some places are engaging their own so-called “buyer’s broker or agent.” How they are paid and by whom varies from place to place and can be negotiated in many cases. Sellers frequently also pay for such services on behalf of buyers but if a charge is paid by the buyer, it will also be stated on the TRID Closing Disclosure and added to the amount you’ll need to bring to closing.

Loan Fees – Direct Loan Costs (Section A)

Most people need to obtain a mortgage loan to pay for their home. There are often fees associated with obtaining a loan such as the ones listed below. These fees include ones paid directly to the lender or the lender’s designated payee. Fees payable to third-party loan originators (typically Mortgage Brokers) are also shown in this section of the TRID Closing Disclosure.

•Loan Origination Fee – This fee covers the lender’s cost of obtaining financing and administration for your loan. The fee is usually calculated as a percentage of the loan amount but can also be in a flat dollar amount. It has become more common for an “application” fee (stated in flat dollar amount) and, possibly, other up-front charges like an “underwriting” fee (also usually in flat dollar terms) either to take the place of or be in addition to an origination fee. Each lender and each loan program a lender offers will have different front-end charges. You should shop carefully and examine all the fees and terms prior to closing. It is generally too late to change those fees and terms at closing.
•Loan Discount (Sometimes referred to as “points”) – This is a one-time fee charged by the lender in order to give you a lower interest rate on your loan. Each point is 1% of the mortgage amount. Points paid upfront can reduce the interest rate you pay on your loan. Whether this is the best option for you in shopping for a mortgage loan depends on whether you have the necessary cash and how long you think you’ll stay in the home or keep the mortgage before selling or refinancing — the longer you intend to stay and keep the financing, the better off you may be paying something upfront and paying a lower interest rate on your loan. In any event, this cost will be collected at closing generally.

•Mortgage Broker Fee – This fee covers the costs of services of a mortgage broker if one is engaged by the borrower to help them shop for mortgage financing. Mortgage brokers typically present the borrower’s application to a variety of funding sources before helping the borrower make their final selection.
•Yield Spread Premium (YSP) – This is a fee that the funding lender may pay directly to the mortgage broker or other third-party loan originator. This fee is for securing a borrower on behalf of the funding lender at rate and terms agreed upon which may be higher than what is called “at par.” The fee is sometimes called a “Par-Plus Pricing” fee. While this fee is not paid by the borrower (it typically is shown as “POC” by the Lender”), it must be shown on the TRID Closing Disclosure if the mortgage broker is receiving such compensation.

Services Borrower Did Not Shop For (Section B)

•Appraisal Fees – To approve your loan your lender has to obtain an estimate of what your home is really worth. The appraisal fee covers the cost of getting an estimate of the market value of your home, usually by an independent, certified, licensed appraiser.
•Credit Report Fee – Mortgage lenders require a credit report to determine whether or not you are eligible (have good enough credit) for a loan, how much they will lend you and at what interest rate. Credit Reports today often also include a “credit score” which is an indicator of your ability and willingness to repay the loan. The higher your credit score, the better risk you are.
•Lender Inspection Fees – If the lender requires certain inspections to take place before closing (particularly where new construction or recent repairs are involved), such inspection fees, payable to the lender or its designee, will appear in this section of the TRID Closing Disclosure.
•Mortgage Insurance Application Fee – There are often fees associated with processing an application for mortgage insurance. Some private mortgage insurers waive the application fee. This line of the TRID Closing Disclosure may be used for other fees when the borrower is seeking an FHA-insured or VA-guaranteed loan.
•Assumption Fee – If you are taking over the existing mortgage loan on the home, there is often a charge associated with assuming the mortgage, called the assumption fee.

Items required by the Lender to be paid in advance (Section F)

There are certain items the lender may require you to pay at the time of closing or in advance of the actual closing date. These could include:

•Interest – Lenders usually require payment of loan interest from and including the day of closing through the end of the month of closing. After that, interest is accrued and paid as part of the monthly loan installments.
•Mortgage Insurance Premium – At the settlement, you may be required to pay your first year’s mortgage insurance premium, or a lump sum premium that covers the life of the loan. This fee is payable to a Private Mortgage Insurance Company. If the loan is being federally insured (FHA) or guaranteed (VA), the mortgage insurance or funding fees for those government loan programs would be charged here.
•Hazard Insurance Premium – Oftentimes lenders require payment of one year’s hazard insurance, commonly referred to as homeowner’s insurance, against fire, windstorms and natural hazards. In order to bind the coverage, the premium is often paid in advance of closing.
•Flood Insurance – Depending on the location of your home, flood insurance may be required and payment of the first year’s premium must be made in advance of closing.

Escrows/Impounds/Reserves (Section G)

Although the lender isn’t required to provide an estimate of the reserves they will be collecting, it is important that you be aware of whether the lender will or will not be “escrowing” for taxes, mortgage insurance (if any), hazard and flood insurance. The use of an escrow/impound account to build up the funds needed to pay these items as they become due can often be a good way for borrowers to budget rather than having to pay these large sums out-of-pocket when they come due. Be sure to ask your lender in advance of closing how these items will be paid on a go-forward basis.

Title and Closing Charges (B or C)

These fees cover the administrative costs of a title search, title examination, issuance of the title commitment/binder and final title insurance policy(ies.) Also included would be charges for conducting the closing/settlement/escrow. You are free to select the company to conduct your closing/settlement/escrow, and to shop for the best pricing. •Settlement/Closing Fee -A fee must be paid to a settlement agent who has prepared documents, calculated figures, and oversees proper execution of closing documents. This fee is often split between buyer and seller but can be negotiated as part of the sales contract.
•Abstract of Title, Search, Title Examination, Title Insurance Commitment or Binder – In order to ensure that there are no pre-existing problems with your property, a title insurance professional must perform a title search and produce documentation on the home’s title. In some places, one or more of these charges will appear separately on the TRID Closing Disclosure and in other places they may be included within the title insurance premium. When a mortgage loan is involved, there may also be added charges for special endorsements that will accompany the lender’s title policy.
•Document Preparation – Some settlement agents charge for the cost of preparing legal papers such as the mortgage, deed of trust, note or deed and/or other loan and title documentation. If a lender charges a document preparation fee, it will typically appear in the Loan Fees/Direct Loan Costs section of the TRID Closing Disclosure.
•Notary Fee – Because there are legal documents involved, a licensed notary is required to acknowledge the fact that the proper people signed these official documents in their presence. Notaries often charge a fee for their services.
•Attorney fees – Both the homebuyer and the seller might have their own legal representation to prepare and record legal documents. Frequently, however, where an attorney is acting as a settlement agent, there may only be one involved in the closing. Who pays for those services is a matter of contract negotiation but is often handled like fees paid to any other settlement agent/title agent.
•Lender's Title Insurance  – There are two kinds of title insurance policies: Loan and Owner’s policies. The cost for the Loan Policy is based on the loan amount and the cost for the Owner’s Policy is based on the sales price of the home. Who pays these one-time fees at closing varies from state to state. Ask your settlement agent how it is handled in your area. In some circumstances, discounts may be available (such as a “reissue rate” or “reissue credit”) when the property has recently been insured by a title insurer. Be sure to ask if you are entitled to any discounts.

Recording/Government Filing Fees (Section E)

Buying a home is not only a big investment, it is also a matter of public record. The property information and the loan information are required to be filed at the county courthouse or other local government recording office.

•Recording Fees – The recording fee is paid to a government body which enters an official record of the change of ownership.
•Transfer Taxes, Document or Transaction Stamps – These are government charges based on the amount of the mortgage and, often, also on the purchase price. Depending on your location, there could be a city, county or state tax involved, or some combination.

Other, Miscellaneous Charges (Section H)

•Owner's Title Insurance  – The Owner's Policy protects you and your property - your equity. Additionally, The Owner's Policy provides assurance that your Title Company will stand you, if a covered tile problem arises after you buy your home.
•Survey Fee – Lenders and title insurers often require a surveyor to conduct a survey of your property to define the property size and boundaries and to see if any part of the building or other improvements are “encroaching” on a neighbor’s yard — or the other way around. They are also looking to see if there are any setback violations or other material matters that are considered problematic.
•Inspection Fees – When homes are sold an inspection is often recommended and in some cases the contract may even be contingent upon an acceptable inspection report. This fee covers the cost of an inspector to check the dwelling for any structural problems or issues. Frequently, this is a sales contract term imposed by the homebuyer to obtain an accurate assessment of the condition of the property. The work is done prior to closing but the fee is often collected at closing. There are several inspections that a future homeowner might want to request and a lender might require. These could include pest inspections (termites and other wood-destroying organisms), lead paint inspections (for structures built before 1978), roof inspections, water/well certifications, structural or mechanical inspections, or additional specific inspections based on the property type and location.

Harmful Fees That Could Appear on the TRID Closing Disclosure

Consumers should be aware of a relatively new legal instrument, called Wall Street Home Resale Fees (also known as Private Transfer Fees). While traditional covenants have an accepted and beneficial role in the housing market by benefitting the land, these for-profit covenants require homeowners to pay a premium for the right to sell their property. These fees are typically placed on properties by developers and often go unnoticed by unsuspecting homebuyers. Wall Street Home Resale Fees are inserted into home sale contracts by private third parties, and require that every time a home is sold for the next 99 years, a percentage of the sale of the home (usually 1%) be paid to the third party. In return, homeowners receive nothing but reduced home equity and a harder time selling their home. In contrast; resale fees levied by homeowners’ and condo associations direct money back towards homeowners in the form of infrastructure and amenity improvements. This is what differentiates them from the private, for-profit transfer fee.

What Is ALTA?

The American Land Title Association (ALTA), founded in 1907, is the national trade association and voice of the abstract* and title insurance industry. ALTA members search, review and insure land titles to protect home buyers and mortgage lenders who invest in real estate. ALTA is headquartered in Washington, DC.

Members of the association are in business in most counties across the nation. Nearly all title insurance companies hold ALTA membership, in addition to abstracters* and title agents. Nearly 2,000 title agents, abstracters, and title insurance companies are Active members, ranging from small, one-county operations, to large national title insurers. Associate members of ALTA may include attorneys, builders, developers, lenders, real estate brokers, surveyors, consultants, educational institutions, computer services firms, and related national trade associations.

Protecting Homebuyers

ALTA members advocate safe and efficient transfer of real estate and insist on high standards when searching land title records and preparing insurance documents. The industry seeks to eliminate risk before insuring, which provides the insured with the best possible chance of avoiding land title problems. But, title difficulties can and do occur, and members offer both Owner’s and Lender’s title insurance policies as effective safeguards.

Professionals in the real estate market, as well as the home buying public, benefit considerably from the commitment to excellence that is routine in the work of ALTA members. Involvement by a title company is often thought of as the catalyst that allows a real estate closing to proceed smoothly until completed.