Let's start at the very beginning — what does "closing," "settlement," or "closing escrow" on your house mean?
Closing – or settlement as it is known in some parts of the country — is a term used for the point in time at which the title to the property is transferred to the buyer and, generally, a mortgage (or "deed of trust") is given by the buyer/borrower to the lender.
Buying a house is an exciting time and the more you know about the process, the more relaxed you'll be going through it. Keep reading, and we'll walk you through what the closing process really means.
Some information about the costs associated with closing on your home should be provided to you before you put a contract on a house. If you are obtaining a loan to purchase the property, your lender has three days from the time of the loan application to provide you with a Good Faith Estimate of your loan costs so there are no surprises about costs. Within those three days you should also receive a copy of the booklet, "Buying Your Home," which outlines the settlement process. If these two things do not occur, talk to your lender.
Once the seller accepts your sales contract, the countdown to closing begins. Timing is essential to make sure all the ingredients for a successful closing are in place for your arrival. You can shop around to select a settlement agent to prepare the documents for your closing, or you can rely on a recommendation from your real estate agent or lender. In some parts of the country, the settlement agent is an attorney, title company, or escrow company. Once a settlement agent has been selected, he or she will handle the closing process from there. If you have given the seller an earnest money deposit, the escrow agent, settlement agent, or real estate broker (this varies based on where you live), will see that it is promptly deposited into an escrow account where the funds are held until the time of closing.
Next, the settlement agent will request preliminary title work. A title professional will search and examine the public records for information related to your home's title. This provides warnings of title flaws that must be dealt with before the property can change hands. For instance, the previous owner may have failed to pay local or state taxes. Or there may be an outstanding mortgage or judgement on the property. Title professionals work hard to see that such obligations are dealt with and resolve any issues they find well before you go to closing, if possible. If the sales contract calls for a prior mortgage to be paid off, the settlement agent will order payoff figures from the existing lender. If the buyer is assuming the loan, the settlement agent handles that as well. He/she, if directed to do so, also may order property inspections and termite reports. If it is customary in your area, the settlement agent may order a survey.
Finally the settlement agent is ready to prepare the HUD-1 Settlement Statement. The HUD-1, as it is referred to, outlines all of the costs for both the buyer and seller associated with the closing. You can download a copy of the HUD-1 form to see all of the items listed on the form.
On closing day, the property will be transferred from the seller to the buyer. In most parts of the country, you will sign a number of documents that will be explained by your settlement agent. Check with your settlement agent for more details on how the closing is conducted in your area. Once all of the signing is done, the house is yours! Congratulations on achieving the American Dream!
You should be generally aware that the behind-the-scenes process continues after the closing. The settlement agent still must forward payment to any prior lender, pay all the other parties who performed services in connection with your closing, pay out any net funds to the seller, and order a final search of the title to your new home before finally recording all the documents needed legally to complete your purchase. But you don’t have to be involved in any of this. Your settlement agent takes care of these post-closing details!
Closing Costs Explained
Closing Costs Explained
Closing your home should be exciting, and once you understand the process and how it works, it can be.
Here you will find a list of costs commonly associated with closing on a home. Fees may vary depending on where you live, so be sure to talk to your lender, real estate agent, and settlement company for more specific information.
All closing costs must be listed on your HUD-1 settlement form, a document that is required to be filled out prior to finalizing the purchase of your home.
What are My Closing Costs?
In addition to the sales price of the home, there are a variety of costs associated with finalizing the transaction. Vie the sections below for more information on these costs:
Real Estate Broker Commission/Fees (Section 700)
If you use a real estate agent to help you in buying your home, the cost of the agent's services can be paid in one of two ways. Generally, the seller pays for all agents in a transaction in an amount usually stated as a percentage of the sales price. While this amount will be deducted, along with other seller-paid closing costs, from any amount the seller might otherwise be paid and is usually stated on the HUD-1, this will not be your charge. Increasingly, buyers in some places are engaging their own so-called "buyer's broker or agent." How they are paid and by whom varies from place to place and can be negotiated in many cases. Sellers frequently also pay for such services on behalf of buyers but if a charge is paid by the buyer, it will also be stated on the HUD-1 and added to the amount you'll need to bring to closing.
Loan Fees - Direct Loan Costs (Section 800)
Most people need to obtain a mortgage loan to pay for their home. There are often fees associated with obtaining a loan such as the ones listed below. These fees include ones paid directly to the lender or the lender's designated payee. Fees payable to third-party loan originators (typically Mortgage Brokers) are also shown in this section of the HUD-1.
Loan Origination Fee - This fee covers the lender's cost of obtaining financing and administration for your loan. The fee is usually calculated as a percentage of the loan amount but can also be in a flat dollar amount. It has become more common for an "application" fee (stated in flat dollar amount) and, possibly, other up-front charges like an "underwriting" fee (also usually in flat dollar terms) either to take the place of or be in addition to an origination fee. Each lender and each loan program a lender offers will have different front-end charges. You should shop carefully and examine all the fees and terms prior to closing. It is generally too late to change those fees and terms at closing.
Loan Discount (Sometimes referred to as "points") - This is a one-time fee charged by the lender in order to give you a lower interest rate on your loan. Each point is 1% of the mortgage amount. Points paid upfront can reduce the interest rate you pay on your loan. Whether this is the best option for you in shopping for a mortgage loan depends on whether you have the necessary cash and how long you think you'll stay in the home or keep the mortgage before selling or refinancing — the longer you intend to stay and keep the financing, the better off you may be paying something upfront and paying a lower interest rate on your loan. In any event, this cost will be collected at closing generally.
Appraisal Fees - To approve your loan your lender has to obtain an estimate of what your home is really worth. The appraisal fee covers the cost of getting an estimate of the market value of your home, usually by an independent, certified, licensed appraiser.
Credit Report Fee - Mortgage lenders require a credit report to determine whether or not you are eligible (have good enough credit) for a loan, how much they will lend you and at what interest rate. Credit Reports today often also include a "credit score" which is an indicator of your ability and willingness to repay the loan. The higher your credit score, the better risk you are.
Lender Inspection Fees - If the lender requires certain inspections to take place before closing (particularly where new construction or recent repairs are involved), such inspection fees, payable to the lender or its designee, will appear in this section of the HUD-1.
Mortgage Insurance Application Fee - There are often fees associated with processing an application for mortgage insurance. Some private mortgage insurers waive the application fee. This line of the HUD-1 may be used for other fees when the borrower is seeking an FHA-insured or VA-guaranteed loan.
Assumption Fee - If you are taking over the existing mortgage loan on the home, there is often a charge associated with assuming the mortgage, called the assumption fee.
Mortgage Broker Fee - This fee covers the costs of services of a mortgage broker if one is engaged by the borrower to help them shop for mortgage financing. Mortgage brokers typically present the borrower's application to a variety of funding sources before helping the borrower make their final selection.
Yield Spread Premium (YSP) - This is a fee that the funding lender may pay directly to the mortgage broker or other third-party loan originator. This fee is for securing a borrower on behalf of the funding lender at rate and terms agreed upon which may be higher than what is called "at par." The fee is sometimes called a "Par-Plus Pricing" fee. While this fee is not paid by the borrower (it typically is shown as "POC" by the Lender"), it must be shown on the HUD-1 if the mortgage broker is receiving such compensation.
Items Required by the Lender to be paid in advance (Section 900)
There are certain items the lender may require you to pay at the time of closing or in advance of the actual closing date. These could include:
Interest - Lenders usually require payment of loan interest from and including the day of closing through the end of the month of closing. After that, interest is accrued and paid as part of the monthly loan installments.
Mortgage Insurance Premium - At the settlement, you may be required to pay your first year's mortgage insurance premium, or a lump sum premium that covers the life of the loan. This fee is payable to a Private Mortgage Insurance Company. If the loan is being federally insured (FHA) or guaranteed (VA), the mortgage insurance or funding fees for those government loan programs would be charged here.
Hazard Insurance Premium - Oftentimes lenders require payment of one year's hazard insurance, commonly referred to as homeowner's insurance, against fire, windstorms and natural hazards. In order to bind the coverage, the premium is often paid in advance of closing.
Flood Insurance - Depending on the location of your home, flood insurance may be required and payment of the first year's premium must be made in advance of closing.
Escrows/Impounds/Reserves (Section 1000)
Although the lender isn't required to provide an estimate of the reserves they will be collecting, it is important that you be aware of whether the lender will or will not be "escrowing" for taxes, mortgage insurance (if any), hazard and flood insurance. The use of an escrow/impound account to build up the funds needed to pay these items as they become due can often be a good way for borrowers to budget rather than having to pay these large sums out-of-pocket when they come due. Be sure to ask your lender in advance of closing how these items will be paid on a go-forward basis.
Title and Closing Charges (Section 1100)
These fees cover the administrative costs of a title search, title examination, issuance of the title commitment/binder and final title insurance policy(ies.) Also included would be charges for conducting the closing/settlement/escrow. You are free to select the company to conduct your closing/settlement/escrow, and to shop for the best pricing. Be sure to visit the Shopping for Title Insurance section of this site.
Settlement/Closing Fee -A fee must be paid to a settlement agent who has prepared documents, calculated figures, and oversees proper execution of closing documents. This fee is often split between buyer and seller but can be negotiated as part of the sales contract.
Abstract of Title, Search, Title Examination, Title Insurance Commitment or Binder - In order to ensure that there are no pre-existing problems with your property, a title insurance professional must perform a title search and produce documentation on the home's title. In some places, one or more of these charges will appear separately on the HUD-1 and in other places they may be included within the title insurance premium. When a mortgage loan is involved, there may also be added charges for special endorsements that will accompany the lender's title policy.
Document Preparation - Some settlement agents charge for the cost of preparing legal papers such as the mortgage, deed of trust, note or deed and/or other loan and title documentation. If a lender charges a document preparation fee, it will typically appear in the Loan Fees/Direct Loan Costs section of the HUD-1.
Notary Fee - Because there are legal documents involved, a licensed notary is required to acknowledge the fact that the proper people signed these official documents in their presence. Notaries often charge a fee for their services.
Attorney fees - Both the homebuyer and the seller might have their own legal representation to prepare and record legal documents. Frequently, however, where an attorney is acting as a settlement agent, there may only be one involved in the closing. Who pays for those services is a matter of contract negotiation but is often handled like fees paid to any other settlement agent/title agent.
Title Insurance - There are two kinds of title insurance policies: Loan and Owner's policies. The cost for the Loan Policy is based on the loan amount and the cost for the Owner's Policy is based on the sales price of the home. Who pays these one-time fees at closing varies from state to state. Ask your settlement agent how it is handled in your area. In some circumstances, discounts may be available (such as a "reissue rate" or "reissue credit") when the property has recently been insured by a title insurer. Be sure to ask if you are entitled to any discounts.
You also have the option of purchasing a policy with expanded coverage. It's called the Homeowner's Policy and it covers more things than the Owner's Policy. Ask your local title company for an explanation of the expanded Homeowner's Policy so you can decide which policy is the best one for you.
Recording/Government Filing Fees (Section 1200)
Buying a home is not only a big investment, it is also a matter of public record. The property information and the loan information are required to be filed at the county courthouse or other local government recording office.
Recording Fees - The recording fee is paid to a government body which enters an official record of the change of ownership.
Transfer Taxes, Document or Transaction Stamps - These are government charges based on the amount of the mortgage and, often, also on the purchase price. Depending on your location, there could be a city, county or state tax involved, or some combination.
Other, Miscellaneous Charges (Section 1300)
Survey Fee - Lenders and title insurers often require a surveyor to conduct a survey of your property to define the property size and boundaries and to see if any part of the building or other improvements are "encroaching" on a neighbor's yard — or the other way around. They are also looking to see if there are any setback violations or other material matters that are considered problematic.
Inspection Fees - When homes are sold an inspection is often recommended and in some cases the contract may even be contingent upon an acceptable inspection report. This fee covers the cost of an inspector to check the dwelling for any structural problems or issues. Frequently, this is a sales contract term imposed by the homebuyer to obtain an accurate assessment of the condition of the property. The work is done prior to closing but the fee is often collected at closing. There are several inspections that a future homeowner might want to request and a lender might require. These could include pest inspections (termites and other wood-destroying organisms), lead paint inspections (for structures built before 1978), roof inspections, water/well certifications, structural or mechanical inspections, or additional specific inspections based on the property type and location.
Harmful Fees That Could Appear on the HUD-1
Consumers should be aware of a relatively new legal instrument, called Wall Street Home Resale Fees (also known as Private Transfer Fees). While traditional covenants have an accepted and beneficial role in the housing market by benefitting the land, these for-profit covenants require homeowners to pay a premium for the right to sell their property. These fees are typically placed on properties by developers and often go unnoticed by unsuspecting homebuyers. Wall Street Home Resale Fees are inserted into home sale contracts by private third parties, and require that every time a home is sold for the next 99 years, a percentage of the sale of the home (usually 1%) be paid to the third party. In return, homeowners receive nothing but reduced home equity and a harder time selling their home. In contrast, resale fees levied by homeowners' and condo associations direct money back towards homeowners in the form of infrastructure and amenity improvements. This is what differentiates them from the private, for-profit transfer fee.
The American Land Title Association (ALTA) cautions consumers about the impact Wall Street Home Resale Fees have on real estate. When purchasing a home, read through your sales contract to make sure this fee is not attached to your house. If you believe a Wall Street Home Resale Fee has been placed on your property, send an email to ALTA.
What is ALTA?
What Is ALTA?
The American Land Title Association (ALTA), founded in 1907, is the national trade association and voice of the abstract* and title insurance industry. ALTA members search, review and insure land titles to protect home buyers and mortgage lenders who invest in real estate. ALTA is headquartered in Washington, DC.
Members of the association are in business in most counties across the nation. Nearly all title insurance companies hold ALTA membership, in addition to abstracters* and title agents. Nearly 4,000 title agents, abstracters, and title insurance companies are Active members, ranging from small, one-county operations, to large national title insurers. Associate members of ALTA may include attorneys, builders, developers, lenders, real estate brokers, surveyors, consultants, educational institutions, computer services firms, and related national trade associations.
ALTA members advocate safe and efficient transfer of real estate and insist on high standards when searching land title records and preparing insurance documents. The industry seeks to eliminate risk before insuring, which provides the insured with the best possible chance of avoiding land title problems. But, title difficulties can and do occur, and members offer both Owner's and Lender's title insurance policies as effective safeguards.
Professionals in the real estate market, as well as the homebuying public, benefit considerably from the commitment to excellence that is routine in the work of ALTA members. Involvement by a title company is often thought of as the catalyst that allows a real estate closing to proceed smoothly until completed.
Consumers are encouraged to shop for a title company (also called settlement company or attorney in some areas) to conduct the closing and issue you an Owner's Policy of Title Insurance.
Real Estate Glossary
Abstract (of Judgment) — A summary of a money judgment obtained in court. (When this summary or abstract is recorded in the county clerk's or recorder's office, in some states the judgment becomes a lien on the debtor's property.)
Abstract (of Title) — A summary of the public records relating to the title to a particular piece of property. An abstract in some states or areas is reviewed by an attorney or title insurance company to determine whether there are any title defects affecting the property, which must be cleared or paid before a buyer can purchase marketable and insurable title.
Abatement — A reduction or decrease. Usually applies to a decrease in the assessed value of a property resulting in lower property taxes after the assessment.
Acceleration Clause — Clause in a deed of trust or mortgage, which "accelerates" the time when the balance of the loan becomes due. For example, some mortgages contain a provision (an acceleration clause) stating that the full amount of the note shall become immediately due and payable upon the sale of the property or if regular mortgage payments are not made.
Accommodation Recording — The recording of an instrument with the county clerk or recorder by a title company merely as a convenience to a customer; such as a deed between family members. There is no title insurance, nor does the title company assume any responsibility for the correctness or validity of the instrument.
Acknowledgement — A formal declaration before a duly authorized officer (normally a notary public) by a person who has executed an instrument that such execution is his or her own act and deed. An acknowledgment is usually necessary before a county clerk's or recorder's office will accept an instrument for recording. The acknowledgment is either part of, or attached to, the instrument.
Adjustable Rate Mortgage (ARM) — A loan with an interest rate that changes periodically, to more closely coincide with current interest rates. The amounts and times of adjustment are agreed to at the inception of the loan. Typically, however, ARMs can increase two percentage points per year or six percentage points above the initial interest rate.
Administrator — A person appointed by a probate or surrogate court to carry out the administration of a decedent's estate, when the decedent has left no will. If a woman is appointed, she is called an Administratrix.
Adverse Possession — A process of acquiring title to land by taking possession for a certain (statutory) period of time, in addition to fulfilling certain other conditions.
Affidavit — A written statement or declaration, sworn to before an officer who has authority to administer an oath, such as a notary public.
Agent — One who has authorization, either expressed or implied, to act for or represent another party, usually in business matters. For example, a title agent is authorized to issue title insurance policies on behalf of a particular title insurer (underwriter) for a portion of the title premium.
Agreement of Sale — A written contract entered into between a seller (vendor) and buyer (vendee) for the sale/purchase of real property (land). It is known by various names such as contract of sale, sales agreement, contract of purchase, purchase agreement.
All-Inclusive Rate — A title premium rate, which includes the charge for the title insurance policy, as well as the costs associated with the search, abstract, and examination incidental to the issuance of the title insurance policy. Check with your title company to determine if this rate is available in your state.
ALTA (American Land Title Association) — An organization composed of title insurance companies, title agents, and others involved in the title insurance industry, which sets standards for the industry, including title insurance policy forms used on a national basis.
Amortization — A payment plan which enables a borrower to reduce his or her debt gradually through periodic regular payments of both interest and principal that are equal or nearly equal.
Annual Percentage Rate (APR) — The yearly interest rate of a loan, as expressed by the actual rate of interest paid. The APR is disclosed as a requirement of federal truth in lending statutes.
Appraisal — An estimate of the fair market value of a property resulting from an analysis of facts about the property, such as recent sales of neighboring properties.
Approved Attorney — An attorney whose opinion as to the state of title to a property is acceptable to a title insurance company, as the basis for issuance of a title insurance policy by the insurer. The insurer, rather than the attorney, executes the title insurance policy.
Assumption — The act of a Buyer taking title to a property and assuming liability for paying an existing loan secured by a existing mortgage or deed of trust against the property.
Back Title — A copy of the last title insurance policy or title report issued by a title insurer, which describes the title to land upon which a new search is to be made. In some states, this is called the "Starter".
Beneficiary — A person or entity advancing funds which are to be repaid, when a Deed of Trust is used as the security for the repayment of a loan or other obligation. See Deed of Trust.
Blanket Mortgage or Deed of Trust — A mortgage or deed of trust that covers more than one lot or parcel of property. A blanket mortgage or deed of trust is often found in a residential subdivision. As individual lots are sold, a partial release (reconveyance) from the blanket mortgage (deed of trust) is ordinarily obtained.
Bona Fide Purchaser — A buyer who buys property in good faith, for fair value, and without notice of any adverse claims or right of third parties.
Breach of Contract — Failure to perform a contract, in whole or part, without legal excuse.
Building Contract — Also known as Construction Contract. An agreement between an owner (or lessee) and a contractor, setting forth terms relative to the construction/renovation of a structure.
Buydown — A payment to the lender from the seller, buyer, third party, or some combination of these, causing the lender to reduce the interest rate during the early years of a mortgage (deed of trust) loan. The buydown usually applies during the first one to five years of the mortgage (deed of trust) loan.
Certificate of Title — In areas where attorneys examine abstracts or chains of title, a written opinion, executed by the examining attorney, stating that title is vested as stated in the abstract.
Close of Escrow — The date the documents are recorded and title passes from Seller to Buyer. On this date, the Buyer becomes the legal owner, and title insurance policy becomes effective.
Closing — The final procedure in the real estate sales process, where the sale and loan (if applicable) are completed by the execution of documents for recording. In some areas, this procedure is known as the closing of escrow.
Cloud on Title — An irregularity, possible claim, or encumbrance which, if valid, would adversely affect or impair the title.
Coinsurance — A transaction under which each of two or more insurers assumes a designated portion of the liability for the total risk and is liable for only such portion of any loss beginning at the first dollar of loss. (See Reinsurance.)
Collateral — By or at the side, additional or auxiliary.
Collateral Security — Most commonly used to mean some security in addition to the personal obligation of the borrower.
Commitment — A binding contract with a title company to issue a specific title policy, showing only those exceptions contained in the commitment and any intervening matters after the date of the commitment and prior to the effective date of the policy. The commitment contains all information included in the preliminary title report, plus a list of the title company's requirements to insure the transaction. It also includes the standard exceptions from coverage that will appear in the policy.
Community Driveway — A driveway that is jointly owned, used and maintained by two or more persons. Usually, the driveway burdens a portion of each owner's property.
Community Property — In certian states, property acquired by husband, wife or both during marriage which gives each spouse an interest in the property whether each appears in title or not. Check with your attorney to see if your state recognizes Community Property.
Comparable Sales — Sales that have similar characteristics as the subject property, used for analysis in the appraisal. Commonly called "comps".
Condemnation — The taking of private property by the government for public use — as for a street or a storm drain — upon making just compensation to the owner. This right or power of government to take property for a necessary public use is called "eminent domain".
Conservator — A person appointed by the court to care for the person and/or property of an incompetent adult or an adult unable to care for their person or property because of health.
Constructive Notice — Notice imparted by the public records of the county (or town) when documents entitled to recording are recorded.
Conveyance — An instrument in writing, such as a deed or trust deed, used to transfer (convey) title to property from one person to another.
Covenant — (1) A formal agreement or contract between two parties in which one party gives the other certain promises and assurances, such as the covenant of warranty in a warranty deed. (2) Agreements or promises contained in deeds and other instruments for performance or nonperformance of certain acts, or use or nonuse of property in a certain manner.
Covenants, Conditions and Restrictions — Commonly called "CC & R's" the term usually refers to a written recorded declaration which sets forth certain covenants, conditions, restrictions, rules or regulations established by a subdivider or other landowner to create uniformity of buildings and use within tracts of land or groups of lots. The restrictions also can be established by deed. CC & R's are sometimes referred to as private zoning.
Debt — Money owing from one person to another.
Debtor — One who owes a debt.
Decree of Distribution — A probate court decree that determines how the estate of a decedent shall be distributed.
Deed — Written document by which an estate or interest in real property is transferred from one person to another. The person who transfers the interest is called the "grantor." The one who acquires the interest is called the "grantee." Examples of deeds are grant deeds, administrators' deeds, executors' deeds, quitclaim deeds, etc. The deed to use depends on the language of the deed, the legal capacity of the grantor and other circumstances.
Deed of Trust or Trust Deed — A written document by which the title to land is conveyed as security for the repayment of a loan or other obligation. It is a form of mortgage. The debtor is called the "trustor". The party to whom the legal title is conveyed (and who may be called on to sell the property if the loan is not paid) is the "trustee". The lender is the "beneficiary". When the loan is paid off, the trustee is asked by the beneficiary to issue a "recon" or "reconveyance". This reconveyance corresponds to a Release, Cancellation, or Satisfaction that a mortgage company executes when the mortgage loan is paid off.
Deed Restrictions — Limitations in the deed to a property that dictate certain uses that may or not be made of the property.
Defect — A blemish, imperfection or deficiency. A defective title is one that is irregular and faulty.
Defective Title — (1) Title to a negotiable instrument obtained by fraud. (2) Title to real property, which lacks some of the elements necessary to transfer good title.
Demand Note — A note having no date for repayment, but due on demand of the lender.
Deposit — Money given by the buyer with an offer to purchase. Shows good faith. Also called earnest money.
Description — The exact location of a piece of real property stated in terms of lot, block, tract, part lot, metes and bounds, recorded instruments, or U.S. Government survey (sectionalized). This is also referred to as legal description of property.
Earnest Money Deposit — Down payment made by a purchaser of real estate as evidence of good faith; a deposit or partial payment.
Easement — A right or interest in the use of the land of another which entitles the holder to some use, privilege or benefit, such as to place pole lines, pipe lines or roads thereon.
Eminent Domain — The right of a government to take privately owned property for public purposes under condemnation proceedings upon payment of its reasonable value. See Condemnation.
Encroachment — The presence of an improvement such as a building, a wall, a fence or other fixture, which overlaps onto the property of an adjoining owner.
Escrow — Refers to a neutral third party that follows the instructions of both the buyer and seller to handle all the paperwork of settlement or "closing." Escrow may also refer to an account held by the lender into which the homebuyer pays money for tax or insurance payments.
Fee Simple — An estate under which the owner is entitled to unrestricted powers to dispose of the property, and which can be left by will or inherited. Commonly, a synonym for ownership.
File and Use — In most states, title insurers file rate schedules, title insurance policies and endorsement forms with the State Insurance Department or other state agency and then may use such items or rates starting within a specified period of time after filing. Rates so filed usually are mandatory.
Fixed Rate Mortgage — A mortgage having a rate of interest, which remains the same for the life of the mortgage.
Foreclosure — The sale of property used as security for a debt after default in payment.
Forfeiture of Title — A common penalty for the violation of conditions or restrictions imposed by the seller upon the buyer in a deed or other proper document. For example, a deed may be granted upon the condition that if liquor is sold on the land, the title to the land will be forfeited (that is, lost) by the buyer (or some later owner) and will revert to the seller.
Full Disclosure — In real estate, revealing all the known facts, which may affect the decision of a buyer or tenant. A broker must disclose known defects in the property for sale or lease.
"Good Faith" or "Mortgage Savings" Clause — A clause in CC & R's which provides that "a violation thereof shall not defeat or render invalid the lien of any mortgage or deed of trust made in good faith and for value."
Good Faith Purchaser or Mortgagee — A person who buys or lends in good faith, that is, without notice of any existing problem, where value is paid or lent.
Grant — A transfer of real estate, between individuals, by deed. A transfer of real estate from a sovereign is accomplished by patent or royal decree.
Grantee — The Buyer, Purchaser or person to whom the property is transferred in a Deed.
Grantor — The Seller or person from whom the property is transferred in a Deed.
Grant Deed — One of the many types of deeds used to transfer real property. Contains warranties against prior conveyances or encumbrances.
Guardian — A person appointed by a court to manage the person and/or property of one whom is legally incompetent to handle his/her own affairs.
Hazard Insurance — Real estate insurance protecting against fire, some natural causes, vandalism, etc., depending upon the policy. Buyer often adds liability insurance and extended coverage for personal property.
Homestead — A statutory protection from execution or the establishment of title by occupation of real property in accordance with the laws of various states or the Federal Government.
Impounds — A trust type of account established by lenders for the accumulation of borrower's funds to meet periodic payments of taxes, mortgage insurance premiums, and/or future insurance policy premiums, required to protect their security.
Indemnity — Insurance against possible loss or damage. A title insurance policy is a contract of indemnity.
Judgment Lien — A lien against the property of a judgment debtor.
Land Contract — An installment contract for the sale of land whereby the seller (vendor) holds legal title and the buyer (vendee) has equitable title until the sales price is paid in full.
Lease — An agreement by which an owner of real property (lessor) gives the right of possession to another (lessee), for a specified period of time (term) and for a specified consideration (rent).
Legal Description — A description of land recognized by law, based on government surveys, spelling out the exact boundaries of the entire piece of land. It should so thoroughly identify a parcel of land that it cannot be confused with any other.
Lender — Any person or entity advancing funds which are to be repaid. A general term encompassing all mortgagees, and beneficiaries under deeds of trust.
Lien — An encumbrance against property for money, either voluntary or involuntary. All liens are encumbrances but all encumbrances are not liens.
Mechanics Lien — A lien created by statute for the purpose of securing priority of payment for the price or value of work performed and materials furnished in construction or repair of improvements to land, and which attaches to the land as well as the improvements.
Mortgage — A written document by which land is pledged as security for the repayment of a loan, or other obligation. Specifically, (1) To hypothecate as security, real property for the payment of a debt. The borrower (mortgagor) retains possession and use of the property. (2) The instrument by which real estate is hypothecated as security for the repayment of a loan.
Mortgagee — The party lending the money and receiving the mortgage.
Mortgagor — The party who borrows the money and gives the mortgage.
Note — A unilateral agreement containing an express and absolute promise of the signer to pay to a named person (or bearer) a definite sum of money at a specified date or on demand. Usually provides for interest and, concerning land is secured by a mortgage or trust deed.
Obligee — One to whom an obligation (promise) is owed.
Obligor — One who legally binds (obligates) oneself, such as the maker of a promissory note.
Owner's Policy — A policy of title insurance usually insuring an owner of real estate against loss occasioned by defects in, liens against or unmarketability of the owner's title.
Parcel — Any area of land contained within a single description.
Partnership — An association of two or more persons who have contracted to join in business and share the profits.
Party Wall — A wall generally erected on a property boundary or between two lots for the common benefit and use of the property owners on either side.
Patent — A conveyance of title to land by the Federal or State Government.
Personal Property — Any property that is not designated by law as real property (i.e., money, goods, evidences of debt, rights of action, furniture, automobiles).
"P.I.Q." — A term referring to Property In Question.
PITI — A payment that combines Principal, Interest, Taxes, and Insurance.
Plat — A plan, map or chart of a tract or town site dividing a parcel of land into lots.
Power of Attorney — A document by which one person (called the "principal") authorizes another person (called the "agent" or "attorney-in-fact") to act for him or her in a specific manner in designated transactions.
"Pre", "Prelim" or Preliminary Report — A written report issued by a title company, preliminary to issuing title insurance, which shows the recorded condition of title of the property in question. See Commitment.
Priority — The order of preference, rank or position of the various liens and encumbrances affecting the title to a particular parcel of land. Usually, the date and time of recording determine the relative priority between documents.
Public Records — The transcriptions in a county clerkÿs or recorder's office of instruments, which have been filed or recorded, including the indexes pertaining to them.
Quitclaim Deed — A deed operating as a release; intended to pass any title, interest, or claim, which the Grantor may have in the property, but not containing any warranty of a valid interest or title in the Grantor.
Quiet Title — To free the title to a piece of land from the claims of other persons by means of a court order through a court action called a "quiet title" action. The court decree obtained is a "quiet title" decree.
Real Property — Land, from the center of the earth and extending above the surface indefinitely, including all inherent natural attributes and any man-made improvements of a permanent nature place thereon. For example: minerals, trees, buildings, and appurtenant rights.
Reconveyance — An instrument used to transfer title from a trustee to the debtor of real estate, when title is held as collateral security for a debt. Most commonly used upon payment in full of a Deed of Trust. Also called a Deed of Reconveyance or Release.
Recording — Filing documents affecting real property as a matter of public record, giving notice to future purchasers, creditors, or other interested parties. Recording is controlled by statute and usually requires the witnessing and notarizing of an instrument to be recorded.
Reinsurance — A contract which one title insurance underwriter makes with another to protect the first company (wholly or partially) against loss or liability through a separate and distinct contract. Reinsurance differs from coinsurance in that, in the case of reinsurance, only one underwriter has a direct contractual relationship with the insured, and that underwriter (commonly referred to as the "lead insurer") purchases reinsurance in order to lessen or spread the risk. The "lead insurer" will assume a risk up to a limit (the amount of which is referred to as the "retention") and any loss which exceeds this limit would be borne by the reinsurer(s). In the case of coinsurance, each coinsurer has a direct contractual relationship with the insured, and the risk is shared in agreed-upon proportions from the first dollar of loss.
Restrictions — Often called Restrictive Covenants. Provisions in a deed or other instrument whereby an owner of land prohibits or restricts certain use, occupation or improvement of the land.
Right of Way — (1) The right to pass over property owned by another usually based upon an easement. (2) A path or thoroughfare over which passage is made. (3) A strip of land over which facilities such as streets, highways, railroads or power lines are built.
Sale and Leaseback — A transaction in which the Grantor (Seller) in a deed to a parcel of property sells it, but retains the right to continue to possess or occupy it, by simultaneously leasing it from the Grantee (Buyer).
Separate Property — Property owned by one spouse exclusive of any interest of the other spouse.
Squatter — One who settles upon unoccupied land without legal claim or authority. (See Adverse Possession.)
Starter — A copy of the last title insurance policy or title report issued by a title insurer, which describes the title to land upon which a new search is to be made. In some states, this is called the "back title".
Subdivision — An area of land laid out and divided into lots, blocks, and building sites, and in which public facilities are laid out, such as streets, alleys, parks, and easements for public utilities.
Subordination Agreement — An agreement by which one encumbrance (for example, a mortgage or deed of trust) is made subject to another encumbrance (for example, a new mortgage or deed of trust; or perhaps a lease) To "subordinate" is to "make subject to", or to make of lower priority.
Surface Rights — Rights to enter upon and use the surface of a piece of land, usually in connection with an oil and gas lease or other mineral lease. They may be "implied" by the language of the lease (no explicit reservation or exception of the surface rights) or "explicitly" set forth.
Survey — The measurement by a surveyor of real property, which delineates the boundaries of a parcel of land. An ALTA survey additionally delineates the exact location of all improvements, encroachments, easements and other matters affecting the title to the property in question. In certain areas, a title insurance company as part of the real estate transaction may require a survey.
Tax Deed — A deed executed by the sheriff or tax collector to the state, county or city when no redemption is made from a tax sale.
Tax Sale — The process of "selling" a property to the governing authority (usually a state) because of unpaid real estate taxes. No actual sale takes place. Title is transferred to the governing authority and typically the former owner may redeem it within a certain time (which varies by area) by paying taxes, penalties and costs.
Testate — A person who leaves a legally valid Will at death. Opposite of Intestate.
Title — (1) A combination of all the elements that constitute a legal right to own, possess, use, control, enjoy and dispose of property or a right or interest therein. (2) The rights of ownership to land recognized and protected by the law.
Title Insurance — A statement of the condition of title or ownership of real property, insured as such by a title insurance company. For a one—time—only premium, the named insured and their heirs are protected against title defects, liens and encumbrances existing as of the date of the policy and not specifically excluded from it. In the event of a claim, the title company provides legal defense for the policyholder and pays any covered losses incurred as a result of such claim.
Title Report — See Commitment. Compare with Preliminary Report.
Title Search — A review of all recorded documents affecting a specific parcel of land to determine the present condition of title.
Trustee — A lender when a Deed of Trust (instead of a Mortgage) is used as the security for the repayment of a loan or other obligation. See Deed of Trust.
Trustor — A borrower when a Deed of Trust (instead of a Mortgage) is used as the security for the repayment of a loan or other obligation. See Deed of Trust.
Variable Interest Rate — An interest rate that changes in keeping with a current index or cost of money.
Vendee — The Buyer or Purchaser in an Agreement of Sale, Contract of Sale, Sales Agreement, Contract of Purchase, or Purchase Agreement.
Vendor — The Seller in an Agreement of Sale, Contract of Sale, Sales Agreement, Contract of Purchase, or Purchase Agreement.
Vendor's Lien — An implied lien given by law to a vendor for the remaining unpaid and unsecured part of a purchase price.
Vesting — The names, status and manner in which title of ownership to a particular piece of land is held; also that section of a title report, commitment, or policy setting forth the above.
Waive — To voluntarily and intentionally relinquish a known right, claim or privilege.
Warranty Deed — A deed used in many states to convey fee title to real property.
Shopping For Title Insurance
Shopping For Title Insurance
In most states, consumers are free to shop for title insurance and to select a title company, settlement company, or attorney to conduct their closing. (Ask a local title company if consumers are able to shop for title insurance in your state.) Many consumers rely on their real estate agent or lender for a recommendation for a title company since they are in a position to know which companies provide good service. However, you are not required to use the title company they recommend. There are some things to keep in mind, however, which vary from state to state. And there are some terms you will want to know when speaking with title companies asking for a rate quote.
Types of Title Insurance
Knowing what you are asking for is your first step in shopping for title insurance rates. There are two kinds of title insurance: the Loan Policy, which protects the lender's investment, and the Owner's Policy of Title Insurance, which protects the buyer's interests. If you are obtaining a loan to purchase your house, the lender will usually require that you purchase a Loan Policy to protect their investment. We strongly encourage consumers to obtain an Owner's Policy for a one-time fee paid at closing to protect their interests. Who pays for the Owner's Policy varies from state to state and sometimes even within a state. For instance, on much of the West Coast, the seller would purchase the Owner's Policy for the buyer. On the East Coast, however, the buyer usually pays for the Owner's Policy. An Owner's Policy is not automatically issued in every state. Be sure to ask your local title company or real estate agent how it's handled in your area and whether the Loan and Owner's policies come together or are sold separately.
How Title Insurance Rates are Set
How title insurance rates are set varies from state to state. Some rates are set by the companies themselves and some are set by the State Department of Insurance. For those states that set the rates (Florida, New Mexico, and Texas), each title company is required to charge the same for title insurance for each different type of policy and for each different type of rate. Some other states, including but not limited to, NY, PA, NJ, OH, and DE, which have rating bureaus authorized under state law, may have uniform rates as well. When shopping in the states listed above, you will receive similar rates for title insurance from each company. While title insurance rates may not be as "shoppable" in these states, the cost of other services provided by the title company may or may not be included in the rate so you can shop for those services. Talk to your local title company for how rates are determined where you live.
As mentioned above, some rates may or may not include other services provided by the title company such as conducting the closing, preparing and notarizing documents, adding endorsements to the policy which may be required (usually by the lender or buyer), and other services. When comparing one rate to another, be sure to get detailed information on what is included in that rate, so you are comparing equally.
Here are some terms that would be helpful to know when talking to a title company. Ask your title company which of these you may qualify for:
Basic Rate: The rate charged to a consumer who does not qualify for a reduced rate such as, but not limited to, the reissue rate or simultaneous issue rate. (see below).
Reissue Rate: The reduced rate for an Owner's Policy issued on a property which was previously insured within some period of years. In some states, the term is also used for a refinance rate (see below).
Simultaneous Issue Rate: The reduced rate for a Loan or Owner's Policy issued on the same property or loan at the same time as another policy. The term usually refers to a Loan Policy issued at the same time as an Owner's Policy when a property is purchased.
Refinance Rate: The reduced rate for a Loan Policy issued on the new loan in a refinance transaction, in which the original loan was previously insured within some period of years.
Risk Rate: A rate that does not include the cost of researching the title or the cost of conducting the closing.
All-Inclusive Rate: A rate that includes at least some part of the cost of researching the title or the cost of conducting the closing.
Closing the sale of your house or business is easy, if you chose the right title company. Title companies, or any settlement agent who performs a closing - attorneys, escrow agents or title insurance companies - are involved in a multitude of activities involved in a closing. Some states require that an attorney conduct the closing. Some escrow agents, and others a title company or agent. Be sure to find out how it's done in your area.
A settlement agent glues together the process of the sale, working with both the buyer and the seller in the transaction. They research the title, making sure there aren't any liens on the property, pay the seller and the old lender, obtain money from the buyer and new lender, obtain recording fees and taxes for the government, and file the paperwork at the local courthouse. In effect they orchestrate the settlement from start to finish.
So how do you find a competent title professional? ALTA recommends going through someone you are already working with - your real estate agent or lender. If you are obtaining a loan, chances are the lender will recommend you use a title company (or attorney if they are required in your state) they are familiar with. If you are not obtaining a loan, ask your real estate agent for a recommendation. Agents and lenders usually have relationships with several title professionals they know are reputable and provide good customer service.
Or ask friends and neighbors if they were happy with their settlement agent and get a referral. You are free to select your own title professional. If you do, there are some things you should look for. How many transactions does the company do? Find out how many employees the company has. A company that does hundreds of closings will be more informed about how to perform the service than a company that does only a few. Is the company sufficiently staffed for the amount of work they do?
Find out if the company is part of the state title association or the American Land Title Association. If they are members, they are keeping abreast of state and federal level current trends and requirements. You can also contact your state insurance department or the Better Business Bureau to see if they have any information on the company.
Keep in mind that settlements vary from state to state and even from county to county. Be sure to ask how it's done in your area so you know what to expect.
Why You Need Title Insurance
Why You Need Title Insurance
When you purchase your home, how can you be sure that there are no problems with the home's title and that the seller really owns the property? Problems with the title can limit your use and enjoyment of the property, as well as bring financial loss. That is what a title search and title insurance are for.
The Title Search
After your sales contract has been accepted, a title professional will search the public records to look for any problems with the home's title. This search typically involves a review of land records going back many years. More than 1/3 of all title searches reveal a title problem that title professionals fix before you go to closing. For instance, a previous owner may have had minor construction done on the property, but never fully paid the contractor. Or the previous owner may have failed to pay local or state taxes (See below for some other common title problems). Title professionals seek to resolve problems like these before you go to closing. What happens if a problem arises after you move in? Read on. (If you are refinancing, scroll down or click here to jump ahead and learn more about what you can expect.)
The Owner's Title Policy
Sometimes title problems occur that could not be found in the public records or are inadvertently missed in the title search process. To help protect you in these events, it is recommended that you obtain an Owner's Policy of Title Insurance to insure you against the most unforeseen problems.
Owner's Title Insurance, called an Owner's Policy, is usually issued in the amount of the real estate purchase. It is purchased for a one-time fee at closing and lasts for as long as you or your heirs have an interest in the property. Only an Owner's Policy fully protects the buyer should a covered title problem arise with the title that was not found during the title search. Possible hidden title problems can include:
Errors or omissions in deeds
Mistakes in examining records
An Owner's Policy provides assurance that your title company will stand behind you — monetarily and with legal defense if needed — if a covered title problem arises after you buy your home. The bottom line is that your title company will be there to help pay valid claims and cover the costs of defending an attack on your title. Receiving an Owner's Policy isn't always an automatic part of the closing process, and is paid for by different people in different parts of the country. Be sure you request an Owner's Policy and ask how it is paid for where you live. No matter who pays for the Owner's Policy, the fee is a one-time fee paid at closing. The Owner's Policy protects you for as long as you or your heirs have an interest in the property.
You also have the option of purchasing a policy with expanded coverage. It's called the Homeowner's Policy and it covers more things than the Owner's Policy. Ask your local title company for an explanation of the expanded Homeowner's Policy so you can decide which policy is the best one for you.
The Loan Policy
There are two types of title insurance: Owner's title insurance, as mentioned above, and Lenders title insurance, also called a Loan Policy. Most lenders usually require a Loan Policy when they issue you a loan. The Loan Policy is usually based on the dollar amount of your loan. It only protects the lender's interests in the property should a problem with the title arise. It does not protect the buyer. The policy amount decreases each year and eventually disappears as the loan is paid off.
Prices vary from state to state. Be sure to ask your settlement or title company about pricing and whether the Loan Policy and Owner's Policy are sold separately or together.
Common Title Problems
Here are three short stories on some common title problems:
Fraud & Forgery
(NAPS) — Those involved in real estate fraud and forgery can be clever and persistent, which can spell trouble for your home purchase.
In a western state, an innocent buyer purchased an attractive home site through a realty company, accepting a notarized deed from the seller. Then another couple, the true owners of the property — who lived in another locale — suddenly appeared and initiated legal action to prove their interest in the real estate was valid. Under the Owner’s Title Insurance Policy of the innocent buyer, bought for a one-time fee at closing, the title company provided a money settlement to protect against financial loss. As it turned out, the forger spent time in advance at the local court house, searching the public records to locate property with out-of-town owners who had been in possession for an extended period of time. The individual involved then forged and recorded a deed to a fictitious person and assumed the identity of that person before listing the property for sale to an innocent purchaser, handling most contacts through an answering service. Also, the identity of the notary appearing on deeds was fictitious as well.
Fraud and forgery are examples of hidden title hazards that can remain undetected until after a closing despite the most careful precautions. Although emphasizing risk elimination, an Owner’s Policy protects you financially through negotiation by the insurer with third-parties, payment for defending against an attack on the title as insured, and payment of valid claims.
(NAPS) — Conflicts over a will from a deceased former owner may suggest a study topic for law school. But the subject can take on a reality dimension and all too quickly your home ownership is at stake.
After purchasing a residence, the new owner was startled when a brother of the seller claimed an ownership interest and sought a substantial amount of money as his share. It seemed that their late mother had given the house to the son making the challenge, who placed the deed in his drawer without recording it at the court house. Some 20 years later, after the death of the mother, the deed was discovered and then filed. Permission was granted in probate court to remove the property from the late mother’s estate, and the brother to whom the residence initially was given sold the house. But the other brother appealed the probate court decision, claiming their mother really did not intend to give the house to his sibling. Ultimately, the appeal was upheld and the new owner faced a significant financial loss. Since the new owner had acquired an Owner's Policy of Title Insurance upon purchasing the real estate, the title company paid the claim, along with an additional amount in legal fees incurred during the defense.
(NAPS) - When buying a home, it's important to remember what you don't know can cost you.
A couple purchased a residence from a widow and her daughter, the only known heirs of the husband and father who died without leaving a will.
Soon after the sale, a man appeared - claiming he was the son of the late owner by a former marriage. As it turned out, he indeed was the son of the deceased man. This legal heir disapproved of his father's remarriage and had vanished when the wedding took place. Nonetheless, the son was entitled to a share of the value of the home, which meant an expensive problem for the unwary couple purchasing the property.
Although the absence of a will hindered discovery of the missing heir in a title search of the public records, an Owner's Policy of Title Insurance issued for a one-time fee at the time of the real estate transaction would have financially protected the couple from the claim by the missing heir. For a one-time charge at closing, an Owner's Policy will safeguard against problems including those even an exhaustive search will not reveal.
An Owner's Policy is necessary to fully protect a home buyer. Lender's title insurance, which is usually required by the mortgage lender, serves as protection only for the lending institution.
I'm refinancing, why do I need title insurance?
When you refinance you are obtaining a new loan, even if you stay with your original lender. Your lender will usually require a new title search and Loan Policy to protect their investment in the property. You will not need to purchase a new Owner's Policy; the one you bought at closing is good for as long as you and your heirs have an interest in the property.
Even if you recently purchased or refinanced your home, there are some problems that could arise with the title. For instance, you might have incurred a mechanics lien from a contractor who claims he/she has not been paid. Or you might have a judgment placed on your house due to unpaid taxes, homeowner dues, or child support for instance. The lender needs reassurance that the title to the property they are financing is clear.
Ask if you qualify for a "refinance" rate, sometimes called a "reissue" rate. These rates are not available in every state, and you might have to meet some criteria to be eligible, so be sure to ask.
I'm buying a newly built home, do I need title insurance?
Construction of a new home raises special title problems for the lender and owner. You may think you are the first owner when constructing a home on a purchased lot. However, there were most likely many prior owners of the unimproved land. A title search will uncover any existing liens and a survey will determine the boundaries of the property being purchased. In addition, a builder may have failed to pay subcontractors and suppliers. This could result in the subcontractor or supplier placing a lien on your property. Again, lenders want to be sure the property has clear title, and they are insuring the correct property. Purchasing an Owner's Policy will protect you against these potential problems and pay for any legal fees involved in defending a claim.
How To File A Claim
An owner's policy of title insurance is intended to provide the homeowner with peace of mind about their legal rights to real property.
Whenever the homeowner has any question or concern about his or her rights, he or she should promptly notify the title insurance company whose name appears on his title policy. The title policy includes instructions for contacting the title insurer, usually at the end of the "Conditions and Stipulations" section within the policy.
If you are unable to locate your policy, or are unsure whether you purchased a policy, you should contact the title company, title agent or attorney that handled your purchase and inquire about your coverage. You can determine if you have title insurance coverage by reviewing the settlement statement ("HUD-1") provided at the closing of your purchase, which itemizes receipts and disbursements by the closing officer. For example, charges for an owner's policy of title insurance are listed on line 1110 of the standard HUD-1 form of settlement statement. Contact information for the title insurer may also be found in telephone directories, on the internet, or by inquiry to your state department of insurance.
When giving notice of a potential claim to the title insurer, you should include the property address, a brief statement of the question or matter that concerns you, copies of any claims documents received, and a copy of your owner's policy (if available).
Remember, the broad coverage of title insurance includes protection against frivolous claims, or "clouds" on title that may not present an immediate problem. So it's best to contact the title insurer promptly, as soon as you have any question or concern about your legal rights with insured land.