What is it?
“Title” refers to ownership rights in a property. The process of buying a home can be boiled down to the legal transfer of title to the property from the Seller to you (the Buyer).
The Title phase of the closing process is when the Seller’s title in the property is investigated by a licensed title company to determine whether it is, in fact, “clear and marketable” (meaning, free of issues and sellable). Of the seven phases of the closing process, the Title phase requires the least involvement from you, since its focus is on examining the property’s history and the Seller. The title company and your attorney will be the primary participants in the Title phase, so from your perspective, it’s a time when you can come up for a little air and regroup after the very hands-on experience of the Inspections phase.
Why is it important?
Just as your Contract with the Seller contains a mortgage contingency and an inspections contingency, it also contains a title contingency. That title contingency specifies the quality of the title that the Seller needs to be able to convey to you at the closing — in other words, how clean the title history of the property needs to be. Specifically, the Seller must be able to provide you with what’s called “clear and marketable” title at the closing. If the Seller is unable to convey clear and marketable title to you, then you can terminate the Contract.
Clear and marketable title means your title to the property upon closing — i.e., your ownership rights in the property, as conveyed to you by the Seller at the closing — must be sufficiently free of any defects and outside claims against your rights, such that a title insurance company would be willing to insure your ownership rights in the property going forward from the closing, by issuing you a title insurance policy.
The title insurance policy that gets issued to you upon closing is called an Owner’s Policy of Title Insurance. This Owner’s Policy will protect you against any losses you might incur as a result of defects in the chain of title leading to your ownership of the Property unexpectedly coming to light after you become the owner.
Some examples of title defects include:
- liens on the property;
- invalid deeds;
- undisclosed heirs of prior owners; and
- mistakes in the recording of property documents.
Without title insurance to protect you, if defects in the chain of title come to light after you’ve become the owner of the property, you’d be on your own to defend yourself against those outside claims threatening your ownership rights. At worst, you could potentially suffer the loss of the entire property in the face of those claims. (Given these high stakes, it is no wonder that pretty much all buyers purchase an owner’s title insurance policy at closing, even though it is technically “optional.”)
Notably, the Title phase of the closing process makes sure not only that your ownership rights are protected, but also that the lender’s interests in the property are protected as well. Remember, the property is the collateral that you’ve pledged to your lender for the loan that the lender is making to you. If your ownership rights in the property are threatened by a defect in the chain of title, that is a threat to the lender’s security. For this reason, generally any time you obtain a mortgage your lender will require that you purchase a Lender’s Policy of Title Insurance for the lender, to protect the lender against any title-related losses that it might suffer. (While yes, you have to pay for both your Owner’s Policy and the Lender’s Policy, the premiums for both policies are one-time payments, made at the closing.)
QUICK TIP: Does title insurance protect me against the past or the future? While your Owner’s Policy coverage begins as of the closing, it is important to understand that the policy only protects you against covered title defects that existed before the closing. In other words, you should think of your title policy as insuring you against title defects that were missed or undiscoverable when the title company performed its Title Search of the public records. It does not apply to title defects that arise after the closing. So, for example, your Owner’s Policy won’t cover you if you default on a debt after the closing and the creditor places a lien on the property.
How does it work?
There are three general parts of the Title phase:
Title Search: The investigation of the title history of a property by a licensed title company.
Title Commitment: The written report prepared by the title company presenting the results of its title search, and the title company’s promise (“commitment”) to insure your title to the property as of the closing, as long as any title defects identified in the commitment are cleared before the closing.
Clearing Title: The process of curing any title defects identified in the title commitment, in order to enable the Seller to convey clear and marketable title to you at closing.
STEP 1: Your Closing Attorney Orders a Title Search from a Licensed Title Company
Most closing attorneys wait until the Inspections phase is concluded to order the title searches for a property. This is because title searches cost money and time that would be wasted if the transaction never made it past the inspections contingency.
While you have the right to choose which title company your attorney orders the title work from, custom and practice is for your closing attorney to choose, since your attorney will presumably have a longstanding and dependable working relationship with one or a few companies.
STEP 2: The Title Company Performs the Title Search
The title company searches the public records to look for any deeds, easements, rights or restrictions, mortgages, other land records, judgments or liens that affect the title to the property.
The goal is to confirm the Seller’s legal ownership of the property and verify that there are no prior or current claims against the property that could impact the transfer of clear title to you at the closing. The search process takes, on average, 5-7 business days.
STEP 3: The Title Company Issues a Title Commitment
After conducting its numerous searches and examinations of the public records and the title history of the property, the title company prepares a title commitment, which is the title company’s agreement (“commitment”) to issue a title insurance policy to you and your lender as of the closing, as long as you satisfy certain listed conditions and requirements and the Seller clears any title defects prior to the closing.
The title company will provide an electronic copy of the title commitment to your attorney, who will forward copies to both you and your lender. Your lender’s own title department will need to review the title commitment to confirm clear title as well. (A title commitment is always listed as a remaining condition on the mortgage commitment that must be satisfied for final loan approval.)
STEP 4: The Seller Clears Any Title Defects
Because a title commitment is not an easy document for a lay person to understand, your attorney will explain to you anything notable found in the commitment. If the title commitment identifies any title defects that need to be cleared by the Seller prior to the closing, your attorney will also notify the Seller’s attorney of those title defects. The Seller’s attorney will then work with the Seller and the applicable outside parties — usually creditors — to cure those title defects.
For example, if the title commitment identifies an old mortgage on the property that was taken out by a prior owner and hasn’t been discharged “of record” (i.e., in the county land records), the Seller will need to track down that lender and, assuming the mortgage was long ago paid off, obtain a “Discharge of Mortgage” document from the lender that can then be filed in the county clerk’s office.
The Contract will stipulate the time within which a title defect must be cleared, most often 30 days. Title defects can, therefore, cause delay to the closing.
In the rare but unfortunate event that the Seller cannot clear a given title defect, you will typically have the right to terminate the Contract.
A property survey is a document depicting the precise location of the property’s boundaries and any improvements and structures within them, as a schematic of angles and measurements. While most lenders don’t require that buyers obtain a new survey as a condition of loan approval, you should plan on getting one (and your attorney will likely advise you the same). The purposes of a survey are two-fold:
- A new survey will give you the most current snapshot of the property, along with any encroachments, boundary issues, setbacks, etc.
- A new survey will allow you to obtain a survey endorsement (i.e., an add-on of coverage) to your title insurance policy that will provide coverage to you for any title-related loss you incur as a result of any inaccuracies in the survey.
On average, a survey of a property that is less than one acre in size costs between $600-800 and takes 7-10 days to complete by a licensed surveyor. While some surveyors allow buyers to pay for the survey at the closing, along with all of their other closing costs, some surveyors require payment upfront. Because you don’t want to order a survey until you’re fairly sure your deal is going to make it to closing, many attorneys will wait until the Title Commitment comes back clean to order the survey.
How do I prepare for it?
1. Good news – you don’t! At least, not really… The Title phase will be largely handled by your attorney, the title company and, if there are title issues that need clearing, the Seller’s attorney and the Seller. So there’s not much you can do but wait and see what the title search and survey reveal about the property.
However, while the title search of the property has nothing to do with you (and everything to do with the Seller and prior owners), you aren’t completely left out of the mix: you should avoid getting any legal judgments against you because the title company runs searches against your name in addition to the Seller’s and prior owners’ names when they’re searching court records. If you’ve got a judgment or other lien against you that your lender doesn’t already know about, it will come to light during the Title phase and can cause real problems with your mortgage application. After all, lenders are very interested in knowing if their borrowers have defaulted on legal and monetary obligations in the past.
Things to remember:
* Although purchasing an Owner’s Policy of Title Insurance is technically “optional,” you should definitely do it. It’s a one-time premium payment made at the closing, to protect your far-larger investment in your home going forward. While, yes, the chances of a title issue arising are slim, if one does arise it can cost you enormous amounts of money to defend and settle it, so the stakes are extremely high. In that sense, the cost of title insurance is a small price to pay in the grand scheme of things.
* Fences are never exactly on the property lines. Theoretically, a property line has no real width. This means that all fences, no matter how much they follow a property line, are never completely ‘on the line.’ Beyond this, minor fence mislocations tend to be the norm rather than the exception, as fence installation is not an exact science and oftentimes natural obstacles like trees or shrubs force deviations from the property line. So don’t be surprised or alarmed when your survey comes back with fences that meander somewhat along the property line. Large mislocations, however,
What happens next?
After the Seller cures any title defects and you’re satisfied with the survey, the Title phase is complete. The next phase of the closing process is a “pre-closing” phase where all remaining loose ends are tied up and logistical plans are set in motion for the closing and your eventual move.
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