Title and Title Insurance

There are two main differences between title insurance and other types of insurance.

--Title insurance protects against events that may have happened in the past, while other insurances protect from future events. --With title insurance, there is only a one-time insurance premium paid at the loan closing, while other insurance types typically require on-going premiums.

Flood Insurance

Flood insurance is also used to protect the security of the collateral property, although its use is determined by the geographic location of the real estate. The appraiser has a responsibility to determine if the property's location is in a flood zone. If the property is designated with an "A" or "V" prefix, proper flood insurance is required

Private Mortgage Insurance (PMI)

Generally required by lenders on conventional loans when the loan-to-value (LTV) is higher than 80%. The intention of PMI is to provide some security to the lender in the event of default, the theory being that higher LTV poses a greater risk of default. Borrowers also qualify for a loan with a lower down payment when they are willing to pay PMI.

Hazard Insurance

Hazard insurance is required to protect the security of the collateral property from damage caused by fire and other risks. It is also commonly known as homeowner's insurance. A loss payee clause, or lien holder clause, is included in hazard insurance policies in order to protect the lender. The clause requires insurance claims to be made jointly payable to the lender and the homeowner so the lender can ensure its collateral is repaired or its debt is retired in the event of damage to the property.

Issue Long Form Policy

If a short form policy is not issued at the time that the loan is disbursed, a long form policy will be issued once the documents that are required to be recorded are stamped with a book and page number and returned from the recorder's office.

Zones B, C, and X

Insurance purchase is not required in these zones.

Types of Title Insurance

Lender's insurance and homeowner's title insurance

Lender's insurance

Lender's policies provide protection against lender loss from title defects or liens.

Reasons for Title Insurance

Lenders require title insurance in order to protect themselves from risks that arise when securing a loan with a property. Title insurance is regulated by state agencies and the Department of Housing and Urban Development.

Mortgage Insurance Premium (MIP)

MIP is required on all FHA loans and is intended in a similar way as PMI. Upfront MIP is collected on all FHA loans in addition to annual MIP, which is collected on a monthly basis. Unlike PMI, Annual MIP is required on most FHA scenarios for a minimum of five years, regardless of the LTV.

Issue Binder/Commitment

Once all open liens, judgments and ownership are determined, the title company will issue a title binder to the lender. The title binder will identify ownership, open liens, open judgments, exceptions and items that must be satisfied in order for the title company to issue a title policy. When the title commitment is submitted to the lender, it usually comes in a package that includes the insured closing letter.

Steps in the Title Process

Steps in the Title Process

Legal Review

The chain of title is prepared by the abstractor (or attorney) and examined by a title attorney. The attorney certifies any areas of concern to the title company to determine ownership, open liens, open judgments, exceptions and requirements that must be satisfied in order to issue a title commitment.

Order Title Search

The originator should provide to the title company the subject property address and borrower's name (in the case of a refinance) or the seller's name (in the case of a purchase transaction).

Key Elements of Title

The title history of a property is composed of recorded instruments on the land records on each property and other statutory interests, i.e. tax liens or mechanics liens. A defect on title can be anything from a lien or judgment to a break in the chain of title.

Mortgage Insurance

There are two types of mortgage insurance: private mortgage insurance and FHA's mortgage insurance premium policy.

Zone V and Zone VE

are the zones that correspond to areas within the 1% annual chance coastal floodplains that have additional hazards associated with storm waves. Mandatory flood insurance purchase requirements apply.

Zone D

is used for areas where there are possible but undetermined flood hazards. In these areas, no analysis of flood hazards has been conducted, but while mandatory flood insurance requirements do not apply, coverage is available.

Recording

is when the deed, deed of trust or other recordable documents are submitted to the courthouse for filing. It is customary for the settlement agent to record documents immediately after closing to ensure priority of lien.

Funding

occurs once all documents are executed and loan conditions are met. The settlement agent receives funds for disbursement.

Closing

occurs when the parties meet to execute documents related to the loan transaction. In the case of a purchase, the parties may include the borrower, seller, real estate agents and the settlement agent. In the case of a refinance, the parties may only be the borrower and the title company representative. In some instances, the loan originator may attend settlement to assist the borrower with any questions.

Homeowners Insurance

provides protection for the borrowers against many potential liabilities, including mechanics liens, unreleased mortgages, improper subdivisions and other third party rights affected on the property over the course of its prior ownership.

Issue Short Form Policy

short form policy is an abbreviated version of a long form title policy that does not require the recording of the deed or deed of trust prior to issuance. Many lenders request that a short form policy is issued at the time that the loan disburses. The title company will later provide an addendum to the lender showing the recording information.

Special Flood Hazard Area (SFHA)

which is defined as an area of land that would be inundated by a flood having a 1% chance of occurring in any given year. This is also referred to as the base or 100-year flood. All flood zones with an "A" or "V" prefix fall into this area.