TITLE & ESCROW

Title insurance, unlike other forms of insurance, such as automobile or life insurance, involves a one-time premium that is paid when you close the real estate transaction.

Purchasing title insurance doesn’t require monthly, quarterly or yearly payments like car and life insurance policies. Unlike medical and casualty insurance premiums, which insure against an unpredictable future event, title insurance guarantees that all events in the past have been cleared. This is an important distinction. Since a title company has searched and evaluated the condition of the title to your property, title insurance guarantees that the title company has not missed any items which may affect your property.

Title companies conduct thorough searches and evaluations of public records so that no claims will ever arise. Of course, as humans, we are never 100% right! Title insurance means that you can make a claim in the event that the condition of your title is not as we say it is. In fact, title insurance companies set aside a percentage of their profits to pay for any claims that arise. The number of actual claims, however, is relatively small.

When your escrow closes, the title company will issue you a policy of insurance. Keep this with your home records, as a copy of it will come in handy in the unlikely event that a problem does arise. Title companies keep records that go back decades, so we will always be ready to back up our policy.

There are basically two types of title insurance policies — one for property owners and one for lenders.

Policies for both owners and lenders are written according to guidelines set down by either the California Land Title Association (CLTA) or the American Land Title Association (ALTA). California can issue both types of policies. Here is a summary of the types of policies and what they cover:

Owners Policies

ALTA Homeowner’s Policy

This is a new and enhanced policy which is now the standard in residential policies.

For the property owner, the ALTA Homeowner’s Policy (or, as we call it, the Eagle Policy) ensures that:

• There is access if the property abuts upon an open, public, dedicated street
• There are no forgeries or failed conveyances in the chain of title
• The insured has a marketable interest in the real property

In addition, the Eagle Policy also offers some expanded features not available in other policies:

• Protection against forgeries that may occur in the future to cloud title
• Protection in the event a structure encroaches into the insured property
• Enhanced right of access coverage, including vehicular and pedestrian access
• Several other features including Subdivision Map Act coverage, Restrictive Covenant Violations coverage, Structural Damage from Mineral Extraction coverage, Map Inconsistencies coverage and Post Policy Increase in Value to 125%.

ALTA Standard Owners Policy

This is the most common type of owners’ insurance available for any commercial or industrial properties and vacant land.

For the property owner, the ALTA policy ensures that:

• There is access if the property abuts upon an open, public, dedicated street
• There are no forgeries or failed conveyances in the chain of title
• The insured has a marketable interest in the real property

The ALTA Owners Policy insures all recorded matters affecting title to the property in order of their priority. In other words, it will show the lender of the first mortgage before the lender on the second mortgage because the first lender has priority.

The ALTA policy may also be ordered by lenders, normally on second deeds of trust by individuals and non-banking or savings and loan lenders. When the ALTA policy is ordered for lenders, it insures all types of property, normally on second deeds of trust by individuals and non-banking or savings and loan lenders.
The ALTA policy does not cover:

• Matters that a correct survey would show
• Unrecorded matters
• Matters that a physical inspection of the property would disclose
• Rights of parties in possession
• Unpatented water and mineral rights
• Matters known, created or assumed by the insured

Lender Policies

ALTA Lenders Policy

The ALTA Lenders Policy is for institutional lenders only (such as banks and savings and loans). It insures lender priority and the fact that it is marketable. It covers both recorded matters as well as unrecorded matters such as:

• Encroachments
• Unrecorded easements
• Access
• Loss of priority
• Unrecorded liens and encumbrances

The coverage on this policy is quite broad. A survey or inspection is often required before a policy is issued. This policy can be issued on all types of real property.

This is general information. To determine the proper choice for your particular situation you must consult with your attorney, legal advisor and/or financial advisor(s).

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 use 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 the 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 and 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.

The escrow holder must be a disinterested third party. In California, the escrow holder may be a title company, a licensed independent escrow company or an escrow division of a real estate company.

There are two important reasons for selecting an established escrow company. One is that real estate transactions require a tremendous amount of technical experience and knowledge to handle properly. The other is that the escrow holder will generally be responsible for safeguarding and accurately distributing the purchase price in accordance with instructions handed them. Escrow Officers with established firms are experienced and trained in real estate procedures, title insurance, taxes, deeds, and Federal and State regulations.

Impartiality

An escrow officer must remain completely impartial throughout the entire escrow process. He or she will usually adopt a courteous but formal manner when dealing with parties to the escrow, keeping conversations to the matters at hand in escrow. This formal behavior is meant for the benefit of all concerned, since the escrow officer must follow the instructions of both parties without bias.

Escrow Instructions

Escrow instructions are written documents, signed by the principals to the transaction, which direct the escrow officer to perform specific steps to be completed prior to the close of escrow.
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 instructions 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, taxes and possibly homeowners association dues.
• Instruction to the escrow holder on the payment of property 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.

The Seller

• Executes all escrow instructions.
• Deposits the executed deed to the buyer with escrow holder.
• Deposits or causes to be deposited other documents as required by the Purchase Agreement or the escrow instructions.
  • This may include, but is not necessarily limited to, all documents to transfer and/or clear title to the buyer, evidence of termite inspection with the Notice of Completion, home warranty contract, city requirements (if any) and Federal and/or State requirements.

The Buyer

• Executes all escrow instructions.
• Approves any inspection reports, preliminary report of title, etc. as called for in the Purchase Agreement or escrow instructions.
• Executes any Deed of Trust necessary to secure the loan(s) on the property.
• Deposits funds for the down payment, plus funds required to pay costs and causes any borrowed money to be deposited with escrow holder to complete the purchase price.

The Lender

• Approves buyer and prepares loan documents for execution by the buyer.
• Deposits proceeds of the buyer’s loan with the escrow holder.
• Directs the escrow holder of the conditions under which the loan funds may be used.

The Escrow Holder

• Receives a copy of the Purchase Agreement from the real estate agent or takes the contract verbally from the parties.
• Prepares escrow instructions, deeds and any other documentation required based on the agreement between the two parties.
• Opens the order for title insurance.
• Obtains demands on existing liens of record.
• Obtains buyer’s approval on the preliminary report of title and termite completion as called for in the Purchase Agreement and escrow instructions.
• Obtains approval from the respective party on any disbursements made through escrow, such as payoffs to the existing lenders, termite inspections/completion, home warranty and any other invoices presented to escrow holder.
• Receives executed escrow instructions from all parties.
• Prepares Estimated Settlement Statement for the respective parties, which shall specify amounts for escrow services, title insurance fees, real estate commissions, payoff of existing deeds of trusts, lien clearances, termite report, home warranty and any other items required to clear title and in accordance with the Purchase Agreement and escrow instructions.
• Receives funds from the buyer and/or lender.
• Receives the deed (and money, if applicable) from the seller.

Closing the Escrow

Once the terms and conditions of both parties’ instructions have been fulfilled, all closing conditions are satisfied, and the safe and accurate transfer of property and money is complete, the escrow is closed.

Division of Charges

The method of dividing the charges for the services performed through escrow or as a result of escrow varies from county to county. The fee and service charges to be divided may include, for example:

• The owner and lenders’ title insurance policy premium
• Escrow fee Transfer tax
• Recordation fees
• Inspection reports
• Costs in connection with a loan

Care must be taken in following the desires of the parties and advising the escrow holder as to the division of charges so that the proper party is assessed correctly at the close of escrow.

Summary

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 and funds.
• Keeping all parties informed of progress on the escrow.
• Responding to the lender’s requirements.
• Securing a title insurance policy.
• Obtaining approvals of reports and documents from the parties required.
• Prorating and adjusting insurance, taxes, rents, etc.
• Recording the deed and loan documents.
• Maintaining security and accountability of moneys owed and owing.

The examples and explanations given 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.

We recommend that you contact the Escrow division of Western Resources Titlewith any further questions.

Additional Information:

• Obtain a fire insurance policy. Your lender will require a hazard and, if applicable, flood insurance policy naming the lender as the Loss Payee. It is to your advantage to shop around for the best rate. Once you have placed your insurance, instruct your agent to call the escrow officer, as there will be additional information required in order to complete the policy.
• Lender’s requirements as to fees:
  • Prepaid Interest: Interest on a real estate loan is paid in arrears. For example, if the lender funds on July 10, interest is collected from that date to August 1. The first payment date is September 1, which will collect the interest from August 1 to September 1.
  • 90% Financing – additional fees may be required such as:
    • Private Mortgage Insurance (PMI). Usually the cost is .05% points. The lender will require one (1) year prepaid through escrow plus two (2) months placed in an impound account.
    • Fire Insurance. The lender will require one (1) year pre-paid through escrow plus two (2) months placed in an impound account.
  • Real estate property taxes: Depending on the month of closing, the lender will require two (2) to five (5) months placed in an impound account. The lender must have enough reserves in the impound account in order to pay the taxes when they become due. Therefore, the amount of reserves is determined by the closing date, date of first payment and the due date of the property taxes.
• Credit cards/personal loans/car loans: Depending on your income to loan ratio, the lender may require that all or a portion of your debts be paid in escrow which information will be supplied to the escrow holder. However, it is your responsibility to submit current billings to escrow for payment as they will not check balances or verify that any recent payments have been made.
• Funds to close escrow: Assembly Bill 512 (Good Funds Bill) effective January 1, 1990, states that a title company may only make funds available for monetary disbursement in accordance with certain guidelines. Since disbursement cannot be made until the documents are recorded, the title company must wait the mandatory time period as stated in the Good Funds Bill.
  • Waiting periods are: wired funds are considered immediate credit, cashier or teller’s checks must be deposited one (1) business day prior to recordation, and any other type of check deposited for closing must be cleared prior to recording, which can delay the close for up to 10 days.
• Close of escrow: The signing of the loan documents and escrow instructions is not considered the closing date. After the buyers sign the loan documents, the escrow officer must package and return them to the lender for their review. Thereafter, the lender may typically take 24 to 72 hours to review and fund the loan. Provided all necessary documentation and additional earnest money deposit has been handed to escrow holder, the lender will be requested to disburse their loan funds. The day after the lender deposits their funds, escrow causes the original documents, such as the deed and/or deed of trust, to be recorded. The recordation day of these documents is called the “Close of Escrow.”
• Power of Attorney: If any of the parties will not be available to sign the escrow instructions, deeds and/or loan documents, notify your real estate agent, lender and escrow holder immediately. Most lenders and title companies will accept a Power of Attorney, however, it must always be pre-approved by the lender and title company prior to close of escrow.
• Title vesting: Your escrow officer, lender and real estate agent should be made aware of how you wish to take title. Determining the title vesting is an individual concern and, for tax purposes, should not be taken lightly. If you are unsure of the different options for your situation, consult with your attorney or tax accountant. Neither your real estate agent, lender or the escrow officer can advise you on this matter.
• Title insurance policy: In most instances, you will be requested to purchase an Owner’s (CLTA/Owners) and/or a Lender’s (ALTA/Lenders) Policy of Title Insurance. A lender will not loan you money without title insurance.
  • CLTA owner’s policy: Insures that you have clear title to your property and that no individual or governmental entity has any recorded rights, liens, claims or encumbrances against your property.
  • ALTA lender’s policy: Issued to institutional lenders only. This policy insures the lender’s priority and the fact that title is marketable with no liens except their deed of trust. It covers both recorded and unrecorded matters such as: encroachments, unrecorded easements, access and loss of priority.
• Supplemental taxes: Usually within 4-6 months after recordation of the grant deed, the County Tax Collector will send you a supplemental tax bill. This tax bill is a pro-rated bill based on the difference of the existing assessment and the new assessment as of date of close of escrow. Your new assessed tax valuation can be from 1.025% to 1.25% of the sales price, depending on the area in which you purchased your property.
• Closing costs for seller and buyer in addition to the lender’s fees:
  • Title and escrow fees
  • Recording fees
  • Document preparation fees
  • Home Warranty, if applicable
  • Termite inspection fee and repair, if applicable
  • Inspection fees: roof, property, septic, water conservation, zoning, etc.
  • Fire and flood (if applicable) insurance premium for one (1) year
  • Tax prorations. If the property produces income, there will also be proration of rents and security deposits
  • Messenger/Federal Express fees
  • Notary fee
  • Demand fees from existing lenders
  • County transfer tax. Some cities also assess a transfer tax
  • City and/or county reports, if applicable
  • For Condominiums or Planned Unit Development: Homeowner’s Association transfer fees, one (1) month dues paid in advance plus proration of homeowners dues