Title And Escrow
-
The Functions of an
Escrow
-
Closing and Title Costs
-
Understanding Title
Insurance
The Functions of an
Escrow
Buying or selling a home (or other piece of real
property) usually involves the transfer of large
sums of money. It is imperative that the transfer
of these funds and related documents from one
party to another be handled in a neutral, secure
and knowledgeable manner. For the protection of
buyer, seller and lender, the escrow process was
developed.
As a buyer or seller, you want to be certain all
conditions of sale have been met before property
and money change hands. The technical definition
of an escrow is a transaction where one party
engaged in the sale, transfer or lease of real or
personal property with another person delivers a
written instrument, money or other items of value
to a neutral third person, called an escrow agent
or escrow holder. This third person holds the
money or items for disbursement upon the happening
of a specified event or the performance of a
specified condition.
Simply stated, the escrow holder impartially
carries out the written instructions given by the
principals. This includes receiving funds and
documents necessary to comply with those
instructions, completing or obtaining required
forms and handling final delivery of all items to
the proper parties upon the successful completion
of the escrow.
The escrow must be provided with the necessary
information to close the transaction. This may
include loan documents, tax statements, fire and
other insurance policies, title insurance
policies, terms of sale and any seller-assisted
financing, and requests for payment for various
services to be paid out of escrow funds.
If the transaction is dependent on arranging new
financing, it is the buyer's or the buyer's
agent's responsibility to make the necessary
arrangements. Documentation of the new loan
agreement must be in the hands of the escrow
holder before the transfer of property can take
place. A real estate agent can help identify
appropriate lending institutions.
When all the instructions in the escrow have been
carried out, the closing can take place. At this
time, all outstanding funds are collected and
fees--such as title insurance premiums, real
estate commissions, termite inspection
charges--are paid. Title to the property is then
transferred under the terms of the escrow
instructions and appropriate title insurance is
issued.
Payment of funds at the close of escrow should be
in the form acceptable to the escrow, since
out-of-town and personal checks can cause days of
delay in processing the transaction.
The following items represent a typical list of
what an escrow holder does and does not do:
THE ESCROW HOLDER:
-
serves as the neutral "stakeholder" and the
communications link to all parties in the
transaction;
-
prepares escrow instructions;
-
requests a preliminary title search to
determine the present condition of title to
the property;
-
requests a beneficiary's statement if debt or
obligation is to be taken over by the
buyer;
-
complies with lender's requirements, specified
in the escrow agreement;
-
receives purchase funds from the buyer;
-
prepares or secures the deed or other
documents related to escrow;
-
prorates taxes, interest, insurance and rents
according to instructions;
-
secures releases of all contingencies or other
conditions as imposed on any particular
escrow;
-
records deeds and any other documents as
instructed;
-
requests issuance of the title insurance
policy;
-
closes escrow when all the instructions of
buyer and seller have been carried out;
-
disburses funds as authorized by instructions,
including charges for title insurance,
recording fees, real estate commissions and
loan payoffs;
prepares final statements for the parties
accounting for the disposition of all funds
deposited in escrow.(These are useful in the
preparation of tax returns)
THE ESCROW HOLDER DOES NOT:
-
offer legal advice;
-
negotiate the transaction;
-
offer investment advice.
Closing and Title
Costs
It's the big day.
The day you go to the title or escrow company, sign
your name on the dotted line, hand over a check and
prepare to take ownership of your new home.
It's also the day that you and the seller will pay
"closing" or settlement costs, an accumulation of
separate charges paid to different entities for the
professional services associated with the buying and
selling of real property.
It's too often a day filled with uncertainty and
stress.
To help you better understand this confusing subject,
the Land Title Association has answered some of the
questions most commonly asked about title, closing and
closing costs.
What services will I be paying for when I pay
closing costs?
You will usually be paying for such things as real
estate commissions, appraisal fees, loan fees, escrow
charges, advance payments such as property taxes and
homeowner's insurance, title insurance premiums, pest
inspections and the like.
How much should I expect to pay in closing
costs?
The amount you pay for closing costs will vary;
however, when buying your home and obtaining a new
loan, an estimate of your closing costs will be
provided to you pursuant to the Real Estate Settlement
Procedures Act after you submit your loan application.
This disclosure provides you with a good faith
estimate of what your closing costs will be in the
real estate process. An itemized list of charges will
be prepared when you close your transaction and take
title to your new property.
Can I pay for my closing costs in installments?
No, and it is easy to understand why. Many different
parties will have fulfilled their responsibilities and
be awaiting payment upon closing. The title or escrow
company will disburse money to those parties, pursuant
to the escrow instructions, when funds are
available.
Will I be allowed to write a personal check to
cover my closing cost?
Your closing funds should be in the form of a
cashier's check, issued by an institution from the
state of your purchase, made payable to the title
company or escrow office in the amount requested. A
personal check may delay the closing or may be
unacceptable to the title or escrow company. An
out-of-state check could also cause a delay in your
closing due to possible delays in clearing the
check.
How much can I expect to pay for Title
Insurance?
This point is often misunderstood. Although the title
company or escrow office usually serves as a meeting
ground for closing the sale, only a small percentage
of total closing fees are actually for title insurance
protection.
Your title insurance premium may actually amount to
less than one percent of the purchase price of your
home, and less than ten percent of your total closing
costs. The title policy is good for as long as you and
your heirs own the property with the payment of only
one premium.
Why are separate owner's and lender's title
insurance policies issued?
Both you and your lender will want the security
offered by title insurance.
Your home is an important purchase, and you will want
to be certain your home is yours, all yours. Title
insurance companies insure your rights and interests
in order to protect you against claims.
Your lender is looking to insure the enforceability of
their lien on your property and marketability. What is
meant by "marketability"? Local lenders will
"originate" a loan here, and, often, sell it to an
out-of-state investor. This investor, who may never
see the property, needs to know that he has a valid
and enforceable lien. Title insurance is the way of
making certain. Without a current title policy, the
loan is essentially unmarketable.
What does my Title dollar pay for?
Title insurers, unlike property or casualty insurance
companies, operate under the theory of "risk
elimination."
Risk elimination can only be accomplished after an
intensive period of risk identification.
Title companies spend a high percentage of their
operating revenue each year collecting, storing,
maintaining and analyzing official records for
information that affects title to real property. The
issuance of a title insurance policy is highly
labor-intensive. It is based upon the maintenance of a
title "plant" or library of title records, in many
cases dating back over a hundred years. Each day,
recorded documents affecting real property are posted
to these plants so that when a title search on a
particular parcel is requested, the information is
already organized for rapid and accurate
retrieval.
Trained title experts are able, with the aid of their
extensive title plants, to identify the rights others
may have in your property, such as recorded liens,
legal actions, disputed interests, rights of way or
other encumbrances on your title. Before closing your
transaction, you can seek to "clear" those
encumbrances which you do not wish to assume.
The goal of title companies is to conduct such a
thorough search and evaluation of public records that
no claims will ever arise. Of course, this is
impossible--we live in an imperfect world, where human
error and changing legal interpretations make 100
percent risk elimination impossible. When claims do
arise, title insurance companies have professional
claims personnel to make sure that your property
rights are protected pursuant to the terms of your
policy.
To conclude, when you pay for your title insurance
policy, you are paying for a team of professionals who
have worked together to deliver you a title insurance
policy which represents protection for your ownership
of real property.
Who can I look for straight answers on Title,
Closing, and closing costs?
Title or escrow company personnel are available to
review and explain your title policy and your closing
statement.
Understanding Title Insurance
What is title insurance? Newspapers refer to it in
the weekly real estate sections and you hear about it
in conversations with real estate brokers. If you've
purchased a home you may be familiar with the benefits
of title insurance. However, if this is your first
home, you may wonder, "Why do I need yet another
insurance policy?" While a number of issues can be
raised by that question, we will start with a general
answer.
The purchase of a home is one of the most expensive
and important purchases you will ever make. You and
your mortgage lender will want to make sure the
property is indeed yours and that no one else has any
lien, claim or encumbrance on your property.
The Land Title Association, in the following pages,
answers some questions frequently asked about an often
misunderstood line of insurance -- title
insurance.
What is the difference between title insurance and
casualty insurance?
Title insurers work to identify and eliminate risk
before issuing a title insurance policy. Casualty
insurers assume risks.
Casualty insurance companies realize that a certain
number of losses will occur each year in a given
category (auto, fire, etc.). The insurers collect
premiums monthly or annually from the policy holders
to establish reserve funds in order to pay for
expected losses.
Title companies work in a very different manner. Title
insurance will indemnify you against loss under the
terms of your policy, but title companies work in
advance of issuing your policy to identify and
eliminate potential risks and therefore prevent losses
caused by title defects that may have been created in
the past.
Title insurance also differs from casualty insurance
in that the greatest part of the title insurance
premium dollar goes towards risk elimination. Title
companies maintain "title plants" which contain
information regarding property transfers and liens
reaching back many years. Maintaining these title
plants, along with the searching and examining of
title, is where most of your premium dollar goes.
Who needs title insurance?
Buyers and lenders in real estate transactions need
title insurance. Both want to know that the property
they are involved with is insured against certain
title defects. Title companies provide this needed
insurance coverage subject to the terms of the policy.
The seller, buyer and lender all benefit from the
insurance provided by title companies.
What does title insurance insure?
Title insurance offers protection against claims
resulting from various defects (as set out in the
policy) which may exist in the title to a specific
parcel of real property, effective on the issue date
of the policy. For example, a person might claim to
have a deed or lease giving them ownership or the
right to possess your property. Another person could
claim to hold an easement giving them a right of
access across your land. Yet another person may claim
that they have a lien on your property securing the
repayment of a debt. That property may be an empty lot
or it may hold a 50-story office tower. Title
companies work with all types of real property.
What types of policies are available?
Title companies routinely issue two types of policies:
An "owner's" policy which insures you, the homebuyer
for as long as you and your heirs own the home; and a
"lender's" policy which insures the priority of the
lender's security interest over the claims that others
may have in the property.
What protection am I obtaining with my title
policy?
A title insurance policy contains provisions for the
payment of the legal fees in defense of a claim
against your property which is covered under your
policy. It also contains provisions for
indemnification against losses which result from a
covered claim. A premium is paid at the close of a
transaction. There are no continuing premiums due, as
there are with other types of insurance.
What are my chances of ever using my title
policy?
In essence, by acquiring your policy, you derive the
important knowledge that recorded matters have been
searched and examined so that title insurance covering
your property can be issued. Because we are risk
eliminators, the probability of exercising your right
to make a claim is very low. However, claims against
your property may not be valid, making the continuous
protection of the policy all the more important. When
a title company provides a legal defense against
claims covered by your title insurance policy, the
savings to you for that legal defense alone will
greatly exceed the one-time premium.
What if I am buying property from someone I
know?
You may not know the owner as well as you think you
do. People undergo changes in their personal lives
that may affect title to their property. People get
divorced, change their wills, engage in transactions
that limit the use of the property and have liens and
judgments placed against them personally for various
reasons.
There may also be matters affecting the property that
are not obvious or known, even by the existing owner,
which a title search and examination seeks to uncover
as part of the process leading up to the issuance of
the title insurance policy.
Just as you wouldn't make an investment based on a
phone call, you shouldn't buy real property without
assurances as to your title. Title insurance provides
these assurances.
The process of risk identification and elimination
performed by the title companies, prior to the
issuance of a title policy, benefits all parties in
the property transaction. It minimizes the chances
that adverse claims might be raised, and by doing so
reduces the number of claims that need to be defended
or satisfied. This process keeps costs and expenses
down for the title company and maintains the
traditional low cost of title insurance.
Articles by CLTA
|
CRB, CRS, GRI, SRES, REOTrans
