What is Title Insurance?

A title insurance policy is an insured statement about ownership of a particular piece of real estate.  The policy insures the owner or lender against loss caused by encumbrances or defects in title.

A preliminary commitment for title insurance, commonly called a title report, is the first step in issuing title insurance; it is issued after a thorough search of the public records has been performed.  It reveals the condition of title to real estate, including any monetary encumbrances against the property, easements, covenants, conditions and restrictions and any other matters that affect the ownership and use of the property.

The second and final stage of the insuring process occurs after the deed or deed of trust is recorded in the public records, at which time the final title insurance policy is issued.


Why do you need Title Insurance?

Title to real estate is not like title to a car.  There’s no Certificate of Title that proves you are the owner.  Only a title search can trace previous owners, loans they may have taken out, judgments or liens they may have incurred, easements they may have granted, or restrictions they may have placed upon the property.  Title hazards such as fraud, missing heirs, and unpaid encumbrances can affect title to real estate even after that owner no longer owns the property.

Title insurance protects you against such title hazards.  It makes your home safely yours.  Your title insurance policy is your shield of protection and will defend your ownership against loss.  You pay one premium only — your protection and peace of mind last as long as you and your heirs remain in ownership.


How much does Title Insurance cost?

The title insurance premium is determined by the amount and type of coverage to be provided.  Unlike other types of insurance, the premium for title insurance is paid only once and coverage lasts as long as the insured holds an interest in the property.


Who pays for Title Insurance?

Customarily, the seller pays for the title insurance premium that protects the buyer’s title to the property (the “Owner’s Policy”).  However, the buyer and seller may negotiate otherwise.

If the buyer is obtaining a loan to purchase the property, the lender will usually require a title insurance policy to protect their interest in the property (the “Lender’s Policy”).  The buyer typically pays this expense, unless buyer and seller negotiate otherwise.


How long does Title Insurance coverage last?

Title insurance coverage lasts as long as the insured has an interest in the property.  For the buyer, the policy is in effect for as long as the buyer or his/her heirs own the property.  For the lender, the policy is in effect until the loan is paid in full.


What type of policy do I need?

A Homeowner’s Policy is the default policy specified by the multiple listing service, and provides additional risk protection beyond that afforded by a Standard Coverage Owner’s Policy.  The premium is 10% higher than that for a Standard Coverage Owner’s Policy.

In addition to Standard Coverage and Homeowner’s Policies, an Owner’s Extended Coverage Policy is available to cover losses such as questions of survey, such as lot size, location of boundaries and easements, unrecorded liens for labor or materials, parties in possession of the property not disclosed by public records and breach of covenants, conditions and restrictions.  There’s an additional premium of 30% above a Standard Coverage Owner’s Policy for an extended coverage policy to cover the additional risks.  A survey, commonly called an “ALTA survey,” may be required to issue an Owner’s Extended Coverage Policy.

A lender’s policy is issued to the lender to protect their interest in the property secured by a deed of trust or a mortgage.  Most lenders usually require a Lender’s Extended Coverage Policy, which provides additional protection against risk.


What happens in Escrow?

Escrow is an arrangement in which a neutral third party, called an escrow closer, holds documents and funds on behalf of a buyer and seller, and distributes them according to the buyer’s and seller’s instructions.

People buying and selling real estate often open an escrow for their protection and convenience.  The buyer can instruct the escrow closer to disburse the purchase price only upon the satisfaction or completion of certain prerequisites and conditions, like the Seller providing a deed and clear title to the property.  The seller can instruct the escrow closer to retain possession of the deed to the buyer until the seller’s requirements, including receipt of the purchase price, are met.  Both rely on the escrow closer to carry out faithfully their instructions relating to the transaction and to advise them if any of their instructions are not mutually consistent or cannot be carried out.

An escrow is convenient for the buyer and seller because both can move forward separately, but simultaneously in providing inspections, reports, loan commitments and funds, deed, and many other items, using the escrow closer as the central contact point.  If the instructions from all parties to an escrow are clearly drafted, fully detailed and mutually consistent, the escrow closer can take many actions on their behalf without further consultations.  This saves much time and facilitates the closing of the transaction.


What are “escrow instructions”?

Escrow instructions are written documents, which direct the escrow closer in the specific steps to completed, so the escrow can be closed.

Typical instructions would include the following:

  • The method by which the escrow closer is to receive and hold the purchase price to be paid by the buyer.
  • The conditions under which a lapse of time or breach of purchase contract provision will terminate the escrow without a closing.
  • Instructions as to the pro-ration of insurance and taxes.
  • The instruction and authorization to the escrow holder to disburse funds for recording fees, title insurance policy, real estate commissions, and any other closing costs incurred through escrow.
    • Instructions to the escrow closer can only follow the instructions as stated, and may not exceed them, it is extremely important that the instructions be stated clearly and be complete in details.


What happens in escrow?

Here are the tasks typically performed by each party in the escrow process:

The Seller:

1. Deposits the signed deed with the escrow closer.

2. Deposits other required documents and information such as addresses of mortgage holders.


The Lender (if applicable):

1. Deposits the proceeds of the purchaser’s loan.

2. Directs the escrow closer on the conditions under which the loan funds may be used.


The Escrow Closer:

1. Orders a Preliminary Commitment for title insurance.

2. Receives funds from the buyer and/or any lender.  Prorates insurance, taxes, rents, etc.

3. Disburses funds for title insurance, recording fees, real estate commissions, paying off existing loans, etc.

4. Prepares a final Settlement Statement for each party, indicating amounts to be disbursed for services and any further amounts necessary to close escrow.

5. Records deed and loan documents, delivers deed to the buyer, loan documents to the lender and funds to the seller, closing the escrow.

Once all the terms and conditions for the instructions of both parties have been fulfilled, and all closing conditions satisfied, the escrow is closed upon transfer of property and the disbursement of funds.


Who pays which charges?

Unless there is some contrary agreement between the buyer and seller as to how these charges are to be paid, local custom and common Purchase and Sale Agreement forms dictate that the Seller pays for any excise tax due on the sale, Owner’s title insurance insuring the Buyer, and one-half of the escrow fee.  The Buyer pays for lender’s title insurance and loan fees, if they are getting a loan, one-half of the escrow fee, and the recording fees.