Chapter 14: Escrow and Title Insurance Summary
Escrow - the process in which a disinterested third party holds all money and documents relating to a transaction until all of the terms and conditions of the escrow instructions have been satisfied.
The buyers and the sellers are the persons who decide what the escrow instructions will be. The purchase contract itself serves as the basis for the escrow instructions.
Escrow agents: Attorneys, Banks, Brokers, Insurance companies, etc.
The majority of escrows are handled by title insurance companies and independent escrow companies. The remaining are handled by Attorneys and Brokers.
Brokers as Escrow Agents
The Escrow Process
Document most often used is CAR's Residential Purchase Agreement and Joint Escrow Instructions.
Title Insurance - a seller is required to deliver a marketable title at closing.
Title insurance insures the lender (and the property owner for an additional fee). The title insurance company:
Both the buyer and the lender should have title insurance. Insurance for the buyer ensures a clear title and protects his or her investment. Insurance for the lender protects the lender's interest in the property.
Preliminary Title Report shows the condition of the title before the loan or sale transaction.
It contains the owner's name and property description, outstanding assessments, covenants, conditions or restrictions and recorded liens or encumbrances that must be removed before a loan can go through.
Title insurance Policies
California Land Title Association (CLTA) may be issued to a lender only, a buyer only or jointly to lender and buyer (joint-protection standard coverage policy). The buyer and seller negotiate who pays for the CLTA policy. Covers items of record as well as some risks that are not of record, such as:
Items not included in a standard CLTA policy include:
American Land Title Association (ALTA) - an extended coverage policy that insures against many of the items excluded in the CLTA standard policy. This policy gives coverage to the lender, not the buyer. Includes a survey or physical inspection of the property.
No title insurance policy protects against defects known to the insured but not disclosed to the title insurer or Government zoning regulations.
ALTA-R doesn’t provide extended coverage policy. Title insurance companies recommend it to owners of one-to-four unit, owner-occupied residences. Does not include a survey. CAR's purchase agreement form lists the ALTA-R policy as the preferred title policy choice for residential properties.
Closing and Settlement
RESPA applies to purchases of residential property; involving first or second mortgages; financed by a federally-related loan. RESPA does not apply to seller-financed loans. Lenders requirements:
Closing and Settlement Charges
RESPA details the costs that the buyer and seller will pay at closing.
Referral fees are strictly forbidden for title search/insurance, inspection, survey, appraisal, loan, etc.
RESPA permits sharing commissions and the payment of referral fees among cooperating brokers or multiple-listing services. The office may charge a fee for the service as long as only the borrower pays the fee.
Settlement Charges - the closing requires that both the buyer and the seller pay certain fees and expenses to settle the transaction.
The escrow agent will subtract the total of the buyer's credits from the total debits and the result will be what the buyer needs to bring to closing.
Buyer's Side
Seller's Side
Prorating Items - expenses paid at closing must be prorated or divided proportionately between the buyer and the seller - Taxes, Insurance, Mortgage interest and Utilities.
For items paid in advance, the buyer will receive a debit and the seller will receive a credit. Other items are those expenses that the seller incurred but have not yet been billed for at the time of closing - paid in arrears.
The HUD Form-1 - the buyer will see the actual debits and credits for the purchase and know exactly how much money to bring to closing. The seller will know exactly how much he or she will receive at closing.
HUD-1, Page 3 - If the lender has exceeded the estimate in the GFE category the lender has two choices: