Why do you need title insurance?
To protect possibly the most important investment you'll
ever make - the investment in real estate.
A lender goes to great lengths to minimize the risk
of lending money for the purchase of real estate. First,
credit is checked as an indication of the borrower's
ability to repay the loan.
Then, the lender seeks assurance that the quality of
the title to the property to be acquired and which will
be pledged as security for the loan is satisfactory.
The lender does this by obtaining a loan policy of title
The loan policy does not protect the borrower.
The loan policy protects the lender against loss due
to unknown title defects. It also protects the lender's
interest from certain matters which may exist, but may
not be known at the time of the sale.
But, this policy only protects the lender's interest.
It does not protect the borrower. That is why a real
estate purchaser needs an owner's policy, which can
be issued at the same time as the loan policy, usually
for a nominal one-time fee.
What is the danger of loss?
If the lender has title insurance protection and the
owner does not, what possible danger of loss exists?
As an example, assume real estate was purchased for
$100,000. A down payment of $20,000 is made, and a lender
holds an $80,000 mortgage lien, or beneficial interest.
The lender acquires title insurance protecting the lender's
interest up to $80,000. But the purchaser's down payment
of $20,000 is not covered.
What if some matter arises affecting the past ownership
of the property? The title insurance company would defend
and protect the interest of the lender. The purchaser,
however, would have to assume the financial burden of
his or her own legal defense. If the defense is not
successful, the result could be a total loss of title
The title insurance company pays the lender's loss
and is entitled to take an assignment of the borrower's
debt. The purchaser loses the down payment, other equity
in the property that may have accumulated, and the property.
And the balance on the note is still due!
How can there be title defect if the title has been
searched and a loan policy issued?
Title insurance is issued after a careful examination
of copies of the public records. But even the most thorough
search cannot absolutely assure that no title hazards
are present, despite the knowledge and experience of
professional title examiners. In addition to matters
shown by public records, other title problems may exist
that cannot be disclosed in a search.
What title insurance protects against.
Here are just a few of the most common hidden risks
that can cause loss of title or create an encumbrance
- False impersonation of the true owner of the property
- Forged deeds, releases or wills
- Undisclosed or missing heirs
- Instruments executed under invalid or expired power
- Mistakes in recording legal documents
- Misinterpretations of wills
- Deeds by persons of unsound mind
- Deeds by minors
- Deeds by persons supposedly single, but in fact
- Liens for unpaid estate, inheritance, income or
What protection does title insurance provide against
defects and hidden risks?
Title insurance will pay for defending against any lawsuit
attacking the title as insured, and will either clear
up title problems or pay the insured's losses. For a
one-time premium, an owner's title insurance policy
remains in effect as long as the insured, or the insured's
heirs, retain an interest in the property, or have any
obligations under a warranty in any conveyance of it.
Owner's title insurance, issued simultaneously with
a loan policy, is the best title insurance value a property
owner can get.
What is an Escrow and Why is it Needed?
An escrow is an arrangement in which a disinterested
third party, called an escrow holder, holds legal 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 holder to disburse the purchase
price only upon the satisfaction of certain prerequisites
and conditions. The seller can instruct the escrow holder
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 holder
to carry out faithfully their mutually consistent 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, 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
closing of the transaction.
Who May Hold Escrows
The escrow holder may be any disinterested third party
(although some states require that certain escrow holders
There are two important reasons for selecting an established,
independent escrow firm, an attorney, or an escrow officer
with a bank, S&L or title insurance company. One
is that real estate transactions require a tremendous
amount of technical experience and knowledge to proceed
smoothly. The other is that the escrow holder will generally
be responsible for safeguarding and properly distributing
the purchase price.
Escrow officers with established firms generally are
experienced and trained in real estate procedures, title
insurance, taxes, deeds and insurance.
An escrow officer must remain completely impartial throughout
the entire escrow process. He or she will normally adopt
a courteous but rather formal manner when dealing with
parties to the escrow, keeping conversation to the matters
at hand in the escrow. This formal behavior is meant
for the benefit of all concerned, since the escrow officer
must follow the instructions of both parties without
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 proration of insurance and
- 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.
What Each Party Does 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
- 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
- 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
- Fulfills any other conditions specified in the
- 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,
- 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, and delivers
the deed to the buyer, loan documents to the lender
and funds to the seller, thereby closing the escrow.
Closing the 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 and the safe
and accurate transfer of property and money has been
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, recordation
fees and cost in connection with any loan being 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.
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 depository of documents and funds.
- Processing and coordinating the flow of documents
- Keeping all parties informed of progress on the
- 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,
- Recording the deed and loan documents.
- Maintaining security and accountability of monies
owed and owing.
It's Not Always This Simple
The examples and explanations described here are designed
to acquaint you with the escrow process and are based
on relatively simple escrows. Every escrow is unique
and most are more complex than explained here. If you
have questions about the escrow process, we suggest
you contact an escrow officer or attorney to obtain
detailed advice and further explanation.