Understanding Title Insurance When Buying a Home
Title Insurance Explained for Home Buyers
of the lesser-known aspects of purchasing a home is the role that title
insurance plays during the closing process. Title insurance is a very important
investment. Here is some information to help you better understand
its role in the home buying process.
What is Title Insurance?
Title insurance protects real estate owners and lenders from property loss or damage they could experience from liens or defects in the property’s title. Unlike other insurance options that require monthly premiums, title insurance is a one-time fee paid by the seller at the time of closing.
Who is Title Insurance For?
Both homebuyers and lenders need title insurance in order to be insured against various possible title defects on a property. Prior to closing, the insurance company will run a title search on a property. A lien means another company or person has the right to keep possession of the property until the debt is repaid. Without title insurance, the new buyer would be responsible for clearing any defects that are on the property.
Closing Versus Funding
A common misconception about title insurance is the difference between closing on a home and funding a home. While they happen almost simultaneously, closing and funding are different actions and both must occur before the keys to the house are released to the buyer and a check is issued to the seller.
At closing, the seller will sign over the deed to the buyer. The buyer will sign the note, deed of trust, loan application and loan documents.
During funding, the lender will authorize the release of all monies to the seller and all third parties once the funding documents are approved. In order for the transaction to be 100% complete, both parties must complete and sign all of the closing documents, these documents must be verified and approved by the title and lending companies, and funding has to be cleared and sent.
What is Earnest Money?
Many homebuyers have misconceptions about the earnest money deposit required when purchasing a home. The earnest money deposit is a good faith gesture from the buyer that tells the seller they are committed to purchasing the home.
The amount of the deposit is usually 3% of the total purchase price. It is separate from the down payment, but is usually applied to the down payment or to closing costs. The buyer will provide a check to the title company or wire the money to title within 3 days of acceptance of its offer.
The "Know Before You Owe" Mortgage Disclosure Rule
The new Know Before You Owe Mortgage Disclosure Rule will become effective on October 3rd, 2015.
This new rule is also known as the TILA-RESPA Integrated Disclosure Rule Implementation aka TRID. This rule does two things: it simplifies and consolidates some of the required loan and escrow disclosures and it changes the timing of some activities in the mortgage process.
There has been much misinformation around this new rule. Here is what you need to know and it will impact you:
- The Good Faith Estimate and the initial Truth-in-Lending disclosure have been combined into a new form, the Loan Estimate. This new form is designed to provide disclosures that will be helpful to consumers in understanding the key features, costs, and risks of the mortgage loan for which they are applying for . The loan estimate must be provided to consumers no later than the third business day after receiving the consumer’s application.
- The bank appraisals should not be delayed because of the new rules. The procedure for ordering an appraisal is essentially the same under the old and new rules with only one difference: under the new rules lenders will be required to document the buyer’s intent to proceed with a loan in writing.
- The current HUD-1 and the final Truth-in-Lending disclosure have been combined into a new form, the Closing Disclosure, which is designed to provide disclosures that will be helpful to consumers in understanding all of the costs for each party involved in the transaction. This form must be provided to consumers at least 3 business days before consummation of the loan. The “Consummation of the loan” is the day loan documents are signed at the title company, which is usually three to five days before the set date for the close of escrow.
- If the Closing Disclosure is not actually received in person, the new rules require an additional three-day period if it is delivered by mail or electronically. Given that Sunday is not counted, for practical purposes, the Closing Disclosure will have to be delivered seven days before the consummation of the loan. Only 3 changes in the days leading up to closing will require a new 3-day review and the re-issuance of a new Closing disclosure if they occur after delivery of the Closing Disclosure by the title company and before the consummation of the loan .i.e.: 1) the loan type changes (for example, a fixed rate loan is now an adjustable rate); 2) the APR increases above a certain amount (1/8 of a percent for fixed rate loans); and 3) a prepayment penalty is added. In that case, the general rule is that the creditor must deliver or place in the mail the revised Loan Estimate to the consumer no later than three business days after receiving the information sufficient to establish that one of the reasons for the revision described above has occurred. Then a corrected Closing Disclosure containing all changed terms to the borrowers must be issued by the title company. As a consequence, the close of escrow will be delayed.Principal of precaution: the requirement of having to deliver the Closing Disclosure anywhere between three and seven days prior to signing loan documents is a change in the way business is done. Therefore, if would be beneficial to build into escrows an extra 15 days for closings. If for example, you had expected a 30 day closing, now plan for a 45 day escrow as a precautionary measure. Be aware that no other changes in the days leading up to closing will not require a new 3-day review and the reissuance of a new Closing Disclosure. The creditor must only provide a corrected Closing Disclosure containing all changed terms to the borrowers. As a consequence, the close of escrow will not be delayed.
- For example, the following circumstances do not require a new 3-day review: unexpected discoveries on a walk-through such as a broken refrigerator or a missing stove, even if they require seller credits to the buyer, typos found at the closing table. Most changes to payments made at closing, including the amount of the real estate commission, taxes or utilities proration. The creditor must ensure only that the consumer receives the revised Closing Disclosure at or before consummation.