The settlement agent orders a title report, sometimes referred to as a title search or title abstract, from a title company. In certain states, including in the South and Northeast, the title abstract is prepared by a real estate attorney. In short, the title report makes sure that the property you are buying actually matches the property you have agreed to purchase in terms of property lines, type, ownership, zoning and any easements. An easement is a right to use the property by a third party, typically involving a local utility company.
A title company or attorney examines county records to determine the legal ownership of the property. Additionally, the title report identifies exceptions to title, or items that are not covered by the title insurance policy the title company issues. Exceptions to title include any easements or outstanding liens against the property such as a first or second mortgage or pending or past due property tax bill. Existing mortgages on a property are permitted exceptions because they are usually paid off when the property is sold so the lender releases the lien.
The title report makes sure that there are no current liens against the property, such as an outstanding property tax bill or ownership dispute that could interfere with a clear title transfer of the property. All of this information is included in the title report (or title search or abstract) provided to you by the title company or attorney. A clear title report indicates that the property is free of all liens and clears the way for transferring the property from the seller to the buyer at mortgage closing.
A clear title report also clears the way for title insurance to be issued. Title insurance protects the policy holder in the rare event that there are defects or errors in the propertyâ€™s title and a party makes a claim against the property at some point in the future. For example, after the mortgage closes a relative of the seller could claim partial ownership of a property and demand financial compensation or a local government could claim an easement that could undermine the property value.
So basically the title report (or title search or abstract) should make sure that there are no ownership or lien issues associated with the property when it is transferred at mortgage closing, but you have title insurance to protect you in case issues arise in the future. Title insurance pays the policy holder for the financial loss attributable to the resolution of any property title issues.
Unlike the title report (or title search or abstract) which may be provided by a real estate attorney in some states, title insurance is always provided by a licensed title insurance company. Title insurance companies are licensed at the state level and must meet regulatory and capital requirements to ensure they can pay for potential policy claims.
Multiple parties receive title insurance in a mortgage transaction. The buyer receives title insurance which is typically paid for by the property seller. The lender receives title insurance which is typically paid for by the property buyer. The cost of title insurance for the lender may be included in a single fee that also includes the cost of preparing the title report or the title insurance policy may be broken out as a separate cost item, sometimes referred to as a "title insurance binder." Lender's title insurance is usually less expensive than buyer's title insurance which is good news for the borrower because the borrower is typically responsible for this cost.
Title insurance premiums are determined by state regulators so title insurance companies in a given state should offer similar rates. Title insurance rates typically vary by property value with the higher the property value, the higher the insurance premium. Title report and insurance fees for most mortgages typically cost $400 - $800.
Some title companies also have in-house escrow / settlement agent departments that provide mortgage settlement services but fees for settlement services should be listed separately on mortgage disclosure forms such as the Loan Estimate, Closing Disclosure and Lender Fees Worksheet. Additionally, in cases where a real estate attorney is used to prepare the title abstract, the attorney typically also serves as the settlement agent for the mortgage so the fee is greater. Please note that although title insurance rates are determined at the state level, closing procedures, settlement agent costs and attorney costs (if applicable) vary by city.
Similar to selecting the settlement agent, the choice of title insurance company and/or attorney is typically made by mutual agreement between the buyerâ€™s and sellerâ€™s real estate agents.
"B7-2-03, General Title Insurance Coverage." Selling Guide: Fannie Mae Single Family. Fannie Mae, March 31 2015. Web.