Title & Escrow

 

What is Title Insurance?

Over the years with each new possession of a property, events affecting the title can take place – such as a refinancing, a tax lien, an encroachment by a neighbor, or the marriage, divorce or death of an owner. That’s the case even when buying a newly built home.

When a buyer and seller agree on a home or land purchase transaction, a title professional searches public records to see if any outstanding issues could affect the new buyer’s rights. This process, called a title search, provides warnings of title flaws that must be resolved before the property changes hands. At that point, title professionals work to remedy problems that could prevent the new owners from having a “clear” title.

However, the best title search performed by the most experienced and capable experts cannot ensure that no title hazards exist. To help protect the homebuyer, the title professional issues a title insurance policy to insure against most of these unforeseen problems.

There are two kinds of title insurance policies. An Owner’s Policy assures the title company will be there to help pay valid claims and cover the costs of defending an attack on the homebuyer’s title. A homebuyer must request an Owner’s Policy, since it isn’t always an automatic part of the closing process. In addition, the mortgage lender has a great financial interest in the property. A Loan Policy ensures unforeseen title problems will not negatively impact a lender’s rights under the mortgage agreement.

In addition, it’s important to understand title insurance is different from other kinds of insurance, such as homeowners or auto insurance. The premium paid just once for title insurance buys coverage that lasts the entire time the homebuyers or their heirs own the home.

What is an Escrow?

Escrow is the depositing of funds and documents with a neutral third party for delivery upon completion of the terms of the escrow instructions. When the parties deliver documents and money to the Escrow Officer, we say the documents are held “in escrow.” Each of the principals of the escrow (seller, buyer and lender) provide written instructions setting out the conditions under which further delivery is to be made.

The common use of an escrow is to enable the parties in a real estate transaction to deal with each other with less risk, since the escrow holder acts as custodian for funds and documents, as well as the clearing house for payment of all demands.

Typically, an escrow begins with the Escrow Officer opening the order for title work. Based on the information provided, the Title Company searches all public records relating to the property and prepares either a preliminary report or a commitment, providing the customer with the conditions on which the title insurer will issue a policy.

Upon receipt of the preliminary report or commitment, an analysis is made to determine the necessary action and documents required to complete the transaction: demands for satisfaction of liens not acceptable to buyer and/or lender; documents for recording; instructions; and requirements of the new lender. In most areas, buyers and sellers instructions are prepared for signature from the information gathered. When all the title and financial requirements are met, and instructions from all parties can be fully complied with, the escrow is said to be “in perfection” and can close. Then the financial settlement takes place, the documents are recorded and the title insurance policies are issued.

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

Escrow Instructions

Escrow instructions are written documents, signed by the parties giving them, which direct the escrow officer in the specific steps to be completed so the escrow can be closed. Typical instructions would include the following:

The method by which the escrow holder 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.
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 as to the perorations of insurance and taxes.
Instruction to the escrow holder on the payment of prior liens and charges against the property and distribution of the net     sale proceeds.

Since the escrow holder 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 all details.

Who does what in the escrow process?

The Seller 
Deposits the executed deed to the buyer with the escrow holder.
Deposits evidence of pest inspection and any required repair work.
Deposits other required documents such as tax receipts, addresses of mortgage holders, insurance policies, equipment warranties or home warranty contracts, etc.

The Buyer 
Deposits the funds required, in addition to any borrowed funds, to pay the purchase price with the escrow holder.
Deposits funds sufficient for home and title insurance.
Arranges for any borrowed funds to be delivered to the escrow holder.
Deposits any deed of trust or mortgages necessary to secure loans.
Approves any inspection reports, title insurance commitments, etc. called for by the purchase and sale agreements.
Fulfills any other conditions specified in the escrow instructions.

The Lender (If Applicable) 
Deposits proceeds of the loan to the purchaser.
Directs the escrow holder on the conditions under which the loan funds may be used.

The Escrow Holder 
Opens the order for title insurance.
Obtains approvals from the buyer on title insurance report, pest and other inspections.
Receives funds from the buyer and/or any lender.
Prorates insurance, taxes, rents, etc.
Disburses funds for title insurance, recordation fees, real estate commissions, lien clearance, etc.
Prepares a final statement for each party, indicating amounts to be disbursed for services and any further amounts necessary to close escrow.
Records deed and loan documents, delivers the deed to the buyer, loan documents to the lender and funds to the seller, closing the escrow.

Closing Escrow

Once all the terms and conditions of the instructions of both parties have been fulfilled, and all closing conditions satisfied, the escrow is closed. The safe and accurate transfer of property and money has been accomplished.

Division of charges

The method of dividing the charges for the services performed through escrow or as a result of escrow varies from place to place. The fees and service charges to be divided might include, for example, the title insurance policy premium, escrow fee, any transfer taxes, recording fees, and cost in connection with any loan obtained. Unless there is some special agreement between the buyer and seller as to how these charges are to be paid, local custom will generally be followed in drafting the instructions to the escrow holder as to how they are to be divided.

In summary

The escrow process was developed to help facilitate the sale or purchase of your home. The escrow holder accomplishes this by:

Acting as the impartial “stakeholder”, or repository of documents and funds.
Processing and coordinating the flow of documents and funds.
Keeping all parties informed of progress on the escrow.
Responding to the lender’s requirements.
Securing a title insurance policy.
Obtaining approvals of reports and documents from the parties as required.
Prorating and adjusting insurance, taxes, rents, etc.
Recording the deed and loan documents.
Maintaining security and accountability of monies owed and owing.