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Title and Escrow FAQ’s

What is Title?

Unlike other forms of title, like an auto title, a property title is not a paper or electronic document. Property title is a legal concept. When property title is marked “clear,” all parties who claim to own a piece of property are able to successfully defend their full right to that property in a court of law. If a property title is marked “cloud on title” somebody not involved in the transaction may be able to claim a piece of the property for themselves in a court of law.

In the USA, crazy as it sounds, you own whatever you say you do, and if someone disagrees, they need to sue you and prove otherwise.

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What is Title and Escrow?

Title and Escrow is a suite of insurance products, documents, and services required by lenders to close a real estate transaction.

The term “escrow” is used to describe a couple of different aspects of a real estate transaction. Escrow is the money held to secure the transaction, including the downpayment and third-party fees. It is also the term used to refer to the entire closing process– beginning when all parties agree on the terms of the deal and ending when funds are disbursed and legal documents are signed.

Title is the process in which ownership of a property transfers from one person (or business) to another.

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What is a home appraisal?

An appraisal verifies that the house is actually worth the amount it is being purchased for, protecting both the buyer and the mortgage lender. It traditionally involves an in-person visit to the property and an inspection of the house. A real estate transaction may not close if the appraisal is different from the listed price of the property. Appraisals are not part of Title and Escrow process.

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Why is Title and Escrow required?

The Title and Escrow process was established to help protect consumers from fraud. First, it ensures the seller actually has the right to sell the home and makes sure the property is free and clear of any legal issues which might cloud ownership of the property by the bank. Secondly, it ensures all parties are correctly paid and all the proper documents are signed, notarized and filed with the correct authorities.

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How is traditional title insurance different from other types of insurance, such as car insurance?

Title insurance protects against the past, whereas car insurance and the likes of it protect against the future. A car insurance company has no control over whether the insured actually gets into an accident; they can only screen the probability upfront, not the actual event. Title insurance, in contrast, is perceived to work to research all past actual events, delineate/resolve them, and the insurance guarantees the accuracy of that research.

Therefore, title is traditionally more akin to E&O self-insurance (work done by the company is certified against its own demonstrable error), rather than P&C insurance (protection against events that can’t be precisely predicted).

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How large is the Title and Escrow Industry?

Title and Escrow is a $25 billion industry in the US. Each year consumers are charged $15 billion in title fees and $10 billion in escrow fees through the processing of roughly 10 million mortgages.

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Who pays for Title and Escrow?

Every step of the Title and Escrow process incurs fees. The buyer/borrower typically pays most fees, but in some states, the seller will assume some of the costs.

Escrow fees are typically fixed between $400-$500, but they can be much higher (e.g., in Illinois they reach $1000). Title fees are calculated at 0.5% of the property value for resale and about half this amount for refinances. Centralized rates (half that of the full rate), may be offered to high-volume lenders for refinances.

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What are the steps of the Title and Escrow process?

The exact flow of the Title and Escrow process depends on the type of transaction. In a resale transaction the buyer purchases property from a seller, usually with a mortgage loan. In a refinance transaction, the current owner obtains a new loan for the property. There are also other specialized transactions such as builder (new home) and commecial (non-residential) transactions. The following steps illustrate the traditional flow of the Title and Escrow process:

1. The order is placed and categorized. An open order indicates the process has begun. A closed order indicates the transaction was closed. A cancelled order indicates the process was actively cancelled or never progressed. Cancellation occurs about 25-30% of the time. For traditional resale in many states, the seller’s real estate agent (or an attorney) issues the order ahead before the property goes on the market.

2. The Title and Escrow provider is selected, usually by whomever issues the order.

3. An offer is made, and the title process begins.

4. The lender approves the buyer’s application and the buyer deposits funds (downpayment and fees) into open escrow.

5. The property is appraised.

6. The title process begins and a title commitment (or preliminary title report) is produced which consists of a preliminary insurance policy and any title issues that need to be addressed.

7. If the title process results in a clear to close status and the appraisal comes through as expected, escrow work can conclude.This includes the creation of a schedule of fees, the signing and notarization of relevant documents, the disbursement of funds, and the recording of relevant documents in the various county offices.

8. Finally, the title insurance policy itself is issued, consisting of the final commitment plus any changes that have taken place in the interim.

A traditional refinance transaction follows similar steps, except that there is no seller and the bank starts off the title search which makes it the controlling entity in choosing the title provider.

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Is Title and Escrow really always required?

Title and escrow are not required if the buyer is paying for the property without the assistance of a loan (which is really only the case in about 10% of all transactions). If the buyer and seller choose to go without title and escrow, it’s up to them to make sure all legal documents are filed properly, and they bear the risk of any legal issues. For this reason, most individuals still choose to purchase title and escrow, even when there is no loan.

For loans less than 20% of the property value, such as home equity loans, lenders often forgo the title process or request certain non-title insurance products (so-called “lien checks”).

Lenders could choose to go without title and escrow for “balance sheet loans” (loans they do not sell to the secondary market). However, most lenders still require title and escrow services for these loans due to the risks involved.

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Can homeowners shop around for Title and Escrow services?

Yes, home buyers do have the right to select their title and escrow provider. Despite the requirement that title and escrow be explained to buyers and the fact that they sign a piece of paper acknowledging they have a right to use the provider of their choice, more than 90% of the time, the buyer just goes with who their advisor (real estate agent or loan officer or attorney) tells them to use, and accepts the pricing without question.

Some complexity around this area happens during the resale process, where the buyer and seller usually have different real estate agents. Depending on geography, either the buyer’s agent or the seller’s agent (typically the latter) gets to select the title and escrow provider, and sometimes there is sparring between the two of them as to which one to use.

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If title is not paper what is the paper you get?

The document that usually shows ownership is called a “grant deed”. A grant deed is simply a statement on the transfer of ownership between parties. It’s admissible in court, and can be forged (which is a potential source of title fraud).

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What is the system of record for deeds and title issues?

County offices are the official systems of record for deeds and any issues which could cloud title.This county-level focus has led to many problems because there are over 3000 counties, each with a different physical medium for their data (paper, legacy electronic, modern electronic) and different regulations. The complex interplay of state, federal, and county rules makes researching and defending title issues a complex operation. This complexity is part of what led to the inception of the title insurance industry.

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What is a title lien?

A “lien” is a claim to a piece of property for a specific dollar amount. It is filed in the county system of records and can be one of the causes of a clouded title.

A “voluntary lien”is a lien that someone agreed to at some point in time. For example, if a seller once obtained a home equity loan on their property, they voluntarily agreed to give the lender a claim to a piece of their property to use as collateral. Likewise, any buyer/borrower who obtains a mortgage voluntarily agrees that the mortage serves as a lien on the property.

If an owner of a piece of property fails to pay their bills (such as a tax bill, garbage bill, contractor bill, etc.), the party who is owed money can file a lien on the property. This is an “involuntary lien.” Once it is filed, the lien holders have a right to a piece of that property, up to the amount of the lien. Liens are generally first-come, first-served; the first person to have a lien on the property is paid back first.

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What happens during foreclosure?

Banks can foreclose on a property because they have a lien on it. In many states this can happen as fast as 90 days after the last mortgage payment they receive.

The federal and local government, construction contractors, and other parties can also foreclose on a property if the owner defaults on a payment. There is usually a statutory period for these types of foreclosures.

Once the foreclosure process starts, all lien holders are notified by the foreclosing entity. The earliest (most “senior”) lien holder gets paid first, even if they did not initiate the foreclosure process. A properly executed foreclosure process will clear title. However, if all lien holders are not notified (or if other mistakes are made), it’s possible to have title issues on recently foreclosed homes.

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What is a Closing Protection Letter (CPL)?

A Closing Protection Letter “CPL” is a type of non-title coverage provided to the lender by a title underwriter once an order is received. The CPL guarantees that the lender’s disbursement instructions are followed precisely. It also covers the theft of the money in escrow by any of the title employees (even though these employees usually belong to a different agency than the underwriter). For this reason, underwriters need to thoroughly vet the title companies they work with.

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What is a property’s ‘legal description’ and how can it cloud title?

A property’s “legal description” is the geographic boundary of the property. If a legal description is stated incorrectly, it must be fixed through a property survey or else it could become a cloud on title.

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What is an easement and how can it cloud title?

An easement is an agreement which gives the an agreed entity the right to access a certain part of the property, for example to a utility company, to maintain a sewer or natural gas line; title insurance guarantees that there are no unstated easements on its policies.

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What is “vesting” as it relates to property ownership and how does it affect your title ownership?

“Vesting,” a description of the current legal owners of the property, is the most serious type of cloud on title. By default, the vesting on a property is the same as that on the latest grant deed. However, if there’s been a marriage, divorce, or death since the last deed, then depending on the state, the vesting of the property can become a cloud on title.

For example, when a married couple purchases a property, they are both named as the buyers on the grant deed. Should they later divorce, the spouse who is awarded the property still needs permission from the ex-spouse to sell or refinance the home, often through a quit claim deed. If the owner does not obtain a quit claim deed, then when the property is sold to a new owner, the ex-spouse can come out of the woodwork at any time and lay claim to the property. As a result, there would be a total failure of title and the new owner would suddenly have no right to the property whatsoever. In instances like these, the title insurance provider loses a significant fraction of the value of the home.

Finally, we use vesting when we record the documents of lien and property ownership during the closing of a transaction. Proper vesting is crucial to the customer in cases when property ownership changes hands, either in resale or refinance scenarios.

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Are both Owner’s and Lender’s Title Insurance policies required?

A lender’s policy is almost always required when there is a mortgage. Adding an owner’s policy to a lender’s policy usually winds up costing the borrower only $50-$200 in addition to what a standalone Lender’s policy would have cost (though the breakdown gets complicated). As a result, most resale transactions result in two policies being issued: a lender’s policy and an owner’s policy. This is not necessary; the buyer can decide not to get the owner’s policy and save $50-$200, but this rarely happens.

For refinance transactions, only a Lender’s policy is issued, at about half the cost of a resale transaction.

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What is Home Owner’s Title Insurance?

Owner’s Title Insurance is an insurance policy guaranteeing clear title to the owners of a piece of property at time of purchase. If a lien or other title issue is discovered after closing, the policy issuer will cover the costs (as long as the lien or title issue occurred before the closing date).

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What is Lender’s Title Insurance?

Lender Title Insurance is an insurance policy guaranteeing to make the lender “whole” if a title defect is later found that causes financial loss. This means that should the borrower fail to make payments on the loan for which the property is collateral, the lender will be first in line to collect if there is a foreclosure. Even though the insurance policy covers the lender, it’s the buyer/borrower that pays for it!

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Can the property owner get rid of a lien?

If the property owner (or someone on the owner’s behalf) pays the lien, then the owner can ask for the lien to be removed. Oftentimes liens are not removed because either the property owner or the lien holder (or both) neglect to file a release. As a result, the lien often lies dormant until it’s uncovered during the next transaction.

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Are there jurisdictional differences within the US that affect title and escrow?

Yes, title insurance is largely a function of state real property law which varies across the U.S. While there are some industry stakeholders that dictate national standards (i.e. Fannie Mae, CFPB, ALTA, etc.) those standards often allow for regional differences. For instance, in certain states, it is the unauthorized practice of law to conduct escrow or a title search without a law license, whereas in other states, attorneys are generally not involved in the transfer of residential real estate. Other practices like how prices are agreed upon, split between the parties vary greatly across the nation. (see state-by-state laws and customs) Given this wide array of practices, this document attempts to capture the most common behavior; for any particular transaction, the specifics may differ.

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What power does a lien serve?

If a lien holder is able to prove that the property owner is in violation of the law or a legally binding financial contract, they can foreclose on the property after the statutory holding period. In a foreclosure, the property is put up for sale and auctioned even without the owner’s consent to pay or allow title transfer to the lien holder.

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What is a title search?

A title search is an investigation to uncover any possible issues that may "cloud" (or cause problems) in the transfer of property ownership. The search is conducted through the "title plant" (official title records) and includes the current vesting and legal description of the property and any liens along with court records.

If clouds are discovered, the next step is to locate "curatives" (ways to "cure" or fix the title defects). This may include actions needed to remove liens, change vesting, and/or otherwise modify the title so that the transfer of ownership can take place.

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What is a title plant?

A "title plant" is a database of property records, organized by location rather than by property owner. A title plant allows title searches to be completed quickly and efficiently by title companies so that a title can be cleared and title insurance issued. These title plants may be owned by the title company or may be a separate company with a formal information-sharing agreement with title companies-- allowing title companies to access, update, and track a shared pool of property information.

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What is a commitment?

A commitment (known as a "prelim" in California) is the underwriter's promise to issue an insurance policy. It contains all the information that will be included in the actual insurance policy, plus any items uncovered during the title search that need to be cured ("curative items"). The commitment can be updated throughout the curative process to reflect changes (e.g. loan amounts, updates in vesting, etc.) and are binding (except in California).

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How are title defects “cured” (resolved) traditionally?

The traditional process of curing title involves resolving the issues listed on the commitment through research and/or payment. In the case of a lien, once it's been certified as a false positive or paid, a release is submitted to the county (this frequently fails to take place, however).

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What’s a title company?

The term “Title Company” is a bit ambiguous. It could refer to a title underwriter, a title and escrow agency, or a title-only agency. There are also separate escrow-only companies, but they are rare outside of Southern California.

By far the most common way of obtaining Title and Escrow is to solicit the full set of services from a single title and escrow provider.

In Southern California only (from roughly Fresno to San Diego), different title agencies and escrow companies are usually separately engaged for each service.

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What’s a title underwriter?

A title underwriter is the person or company that bears the risk on a title insurance policy. They confirm that a title is clear and able to be insured. Then, if a valid claim is filed because a title defect is found after closing, the underwriter must pay the claim. An underwriter can issue policies in one of two ways:

1. They act as the directly issuing underwriter-- providing a complete title service to the customer by also doing all the title research and work. In this arrangement, the underwriter retains 100% of the title premium.

2. They work with a title and escrow (or title-only) agency who completes all the title research and title work. The partner agency keeps about 85% of the title premium, while the remaining 15% goes to the title underwriter, who is responsible for paying future claims. This is the most common way policies are issued.

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What’s a title agency?

A title agency is a company that typically provides comprehensive title and escrow services, except that it can’t function as an underwriter. In Southern California, a title agency usually provides only title services.

As an example, North American Title Company (NATC) is a title agency that provides title search, title clearing, and escrow services, while North American Title Insurance Company (NATIC) is an underwriter for many NATC policies. They are both owned by States Title Holding.

It is rare for a title agency and title underwriter to be directly affiliated with each other the way NATC and NATIC are. More commonly, title agencies are only partially owned by, or indirectly affiliated with, certain underwriters.

Truly independent title agencies, which don’t have a preferred underwriter, will usually declare themselves as being “independent.”

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What is the Escrow and Post-Closing Process?

The escrow process is often used interchangeably with the term "closing." Technically, closing is only part of the escrow process. The true definition of closing is the part of the escrow process in which all the necessary legal documents are signed by the buyer in the presence of a notary.

The entire escrow process includes everything from scheduling a closing date to filing the closing documents with the county recorder.

The escrow process is handled by the agency. The underwriter is only involved with the issuance of the title insurance policy.

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What are the different components of the escrow process?

The escrow process includes the following:

Scheduling a close date
Once a transaction is clear to close, the agency works with the lender and borrower to pick a convenient close date. The agency (or “settlement agent”) works with an in-house or external notary service to schedule a meeting with the borrower at the desired location. Escrow officers may or may not be present. At States Title, we use a third party notary service for scheduling and do not include escrow officers.

Closing
The notary meets with the borrower(s) in an escrow office or another convenient location. The borrower signs all necessary documents in the “closing package."" This package can reach 100-150 pages for a refi.

Post-closing: funding, disbursement, recording
Once the closing package is signed, it is returned to the agency and lender for review. For refis (except investment properties), the borrower has three days to change or cancel the transaction. This is known as a “right to rescission”).

Funding and disbursement
Once any rights to rescission have expired, the lender wires funds to the escrow account. Funds are then disbursed to the relevant stakeholders and any payoffs, borrower proceeds, fees, or outstanding taxes are paid.

Recording
A portion of the closing package is sent to the county recording office, where the documents are ""made official"" by being placed on county record. Recording can occur before or after fund disbursement, depending on the state. Many counties accept eRecording, while some still require ink-signed originals.

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