Frequently asked questions
Why do I need title insurance?
Because mistakes can happen even when you are in the hands of an expert title examiner. A default or lien going back dozens of years might be missed. A long-lost heir could materialize and claim the property. Also, it’s highly unusual to find a lender who will give you a mortgage without title insurance.
What happens if a title problem is discovered?
Your title or closing agent or attorney will help get it resolved so that the sale can take place. The American Land Title Association (ALTA) estimates that 26% of title searches discover an issue that gets resolved before a title policy is issued. If a problem that is covered by your policy is discovered after the sale, title insurance will usually pay for any covered legal expenses that you incur to resolve the issue.
I’m buying a home that was just built. Do I need title insurance?
It’s a very good idea. Here’s why. You may be the first owner of the home, but the land that it’s built on has probably had many previous owners. Title insurance will protect you against any liens or other pesky problems that could be costly to resolve (including legal fees to defend your claim to the property).
A title policy also comes to the rescue if a subcontractor or supplier who was involved in the construction of the home was not paid by the builder. For example, a carpenter, who has completed the work he was given, may have the right to place a lien on your property if a builder refuses to pay him. (This is not uncommon.)
If I buy title insurance, do I have to pay a premium each month?
No. You only pay once, when you close the transaction and you’re protected from any defects related to title ownership that occurred before you owned the property for as long as you hold title to it.
What's the difference between owner's and lender's title insurance?
An owner's policy protects your rights to a property in the event of a loss due to defects, liens or encumbrances that affect title to the property. A lender's policy insures the bank or other financial institution that is making your mortgage loan for the total amount of the loan. Note: Most lenders require title insurance.What are closing costs?
All the fees you will need to pay for such things as escrow services, a home inspection, an appraisal, hazard insurance, pest inspections, notary services, fees to file your deed with the county recorder, etc. You pay these costs when you close your real estate transaction. (Remember, these are separate from the down payment you make for the property.)
What is Title Insurance?
Title insurance is a policy that protects property owners and lenders from losses that could result from disputes over ownership of a property's title. This could include fraud, liens against the property, or errors missed during a title search.
Title insurance is important because it protects you from title hazards that could threaten the financial investment you have made in your home or other property.
There are two types of title insurance:
Owner's title insurance guarantees that the buyer has the right to the property. It also covers the cost of any legal fees that arise if you have to defend your claim. The cost is based on the price of the property. It is issued for a one-time fee usually due when you are closing or settling the transaction. Insurance benefits are paid only to the name that is on the policy. Coverage lasts as long as you hold title to the property.
Lender's title insurance protects the bank or other lending institution that issues your mortgage from any losses resulting from disputes over who owns the property. A policy covers the amount of the loan and the cost is based on the amount of that loan. Most lenders require this coverage, which ends when the mortgage is paid.Who pays?
Who pays the owner's policy depends on the county where the transaction is taking place. For example, in Los Angeles County, the seller usually pays for the policy to ensure that the buyer has legal and proper title to the property. In Marin County, north of San Francisco, the buyer usually pays this expense.
How much does it cost?
Rates vary enough to make it worthwhile to shop and compare policies and prices. You have the right to choose your title insurance provider.
Ask your title agent about closing package deals. Some title companies offer special rates that may include escrow or settlement services, home warranty insurance or hazard insurance with title insurance at a "bundled" rate.
Many title companies offer a short-term rate for property that has been resold within the past five years. Some offer discounts to seniors, first-time home buyers, government employees, teachers and if the residence is owner-occupied. There may be a discounted bulk rate set for a new subdivision.
If you think you may qualify for any of these rates, be sure to ask various insurers, as you shop and compare.
What is an Appraisal?
An appraisal answers that intriguing question: What is this property worth now?
A real estate appraisal is an unbiased estimate of the true value of a property. It is best conducted by a licensed, certified professional.
If you are selling your home, a professional appraisal can help you determine the current market value to set a fair price. If you're buying a property, an appraisal can confirm whether the property is worth the amount you are paying.
Appraisal Services
Most lenders require a professional appraisal to determine the current market value of a property before they approve a mortgage loan. Since the property you are financing is collateral for the loan, the bank or other lender won't want to loan more than that property is worth.
Usually, the lender will commission the appraisal, which you are entitled to see. You also have the right to choose an appraiser, but make sure that your lender will accept that appraiser's evaluation report. Otherwise you will be paying for two appraisals. Keep in mind that lenders and broker’s agents are not allowed to “up charge” for third party services.
What does an appraiser do?
A state-licensed or certified appraiser has been trained to give an independent estimate of the value of a property based on location, amenities and recent sales of similar properties in the same neighborhood.
An inspection often includes a walk-through to determine the general condition of the property and note any amenities that may add (or detract) value in that area. Often, the appraiser will photograph or sketch the property's layout. If there are any health or safety code violations, the appraiser will list them so they can be corrected before the lender approves a loan.
An appraisal is not a home inspection in which a licensed home inspector or contractor evaluates the structure and mechanical systems (heating, plumbing, air-conditioning, etc.) of a house, from foundation to rooftop.
The appraiser is typically more interested in sales prices (within the past six months) of comparable homes in the neighborhood, the exterior presentation of the property and amenities that enhance the value in that market.
If you are refinancing and the property has been appraised within the past three years, some lenders will be satisfied with a "drive-by" appraisal as an addendum to the original report.
Turn around time for an appraisal should be within 3-7 business days.
How much does it cost?
Lenders are required to charge the fee they are charged by the appraiser. Average rates, range from $350 to $600 depending on the size and value of the property. Prices vary depending on region, type of appraisal report requested and the amount of effort required to complete the report.
Drive-by appraisals and updates to existing reports are usually under $275. Lenders are not likely to approve a loan based solely on a drive-by appraisal.
Who pays?
While an appraisal is usually ordered by the lender, the buyer pays the fee as part of his total closing costs. If you are a motivated seller, you could order and pay for a professional appraisal to support the price you are asking and reduce the buyer's closing costs. Again, be sure to hire an appraiser that has a broad range of lender relationships.
Escrow Agent
The escrow agent, also known as a "closing" or "settlement" agent or officer, is an impartial third party who plays the important role of overseeing the final details of a real estate transaction. Without a closing, there is no sale.
A closing begins when a purchase and sale agreement is signed and ends when the property changes owners. Typically, the process takes four to eight weeks.
The person in charge of the closing must be independent, as he or she represents all sides of the transaction and makes sure that all the terms of the contract are met.
The escrow or closing agent's general responsibilities include:
- Holding financial deposits in trust
- Writing detailed closing instructions based on the purchase agreement
- Gathering all legal documents related to the transaction
- Ordering a title examination or preliminary report on the property
- Clearing all title issues discovered during the search
- Securing title insurance
- Collecting documents from the buyer's lender
- Making sure all terms and conditions of the purchase contract are met
- Recording the deed and other necessary documents
- Ensuring that the process moves along smoothly and that the transaction closes on time
What are common closing costs?
If you are taking a loan to finance your purchase, here are some common closing cost expenses:
- A closing fee for the escrow or closing agent
- Preparation of legal paperwork
- Appraisal review fee
- Credit report fee
- Underwriting fee
- Mortgage insurance
- Survey fee
- Termite inspection fee
- Notary fee for authenticating signatures on legal documents
- Homeowner's insurance
- Courier and overnight delivery fees
- Tax service fee
- Recording and transfer fees
Fees for these services vary. Some banks and other lenders use their own closing agents. Some title companies offer special rates that may include escrow or settlement services, home warranty and title insurance at a "bundled" rate, so it pays to shop around.
Who pays?
Generally, the buyer pays most of the closing fees. In some states, the buyer and seller share the costs. In others, the seller is responsible for the closing fees. The party that pays the closing expenses is negotiable. A motivated buyer or seller may agree to pay all escrow closing fees as a way to finalize the deal.
What is Homeowner’s (Hazard)Insurance?
Also called “hazard,” property” or “casualty” insurance, homeowner’s insurance covers your home if it is damaged by disasters that are listed on the policy.
Homeowner’s insurance becomes effective as soon as your property transaction closes.
What does it cover?
The most basic policy covers your home’s structure for limited disasters. Other policies provide more extensive coverage and protect your personal belongings, too.
Some policies also help pay for living expenses (housing, food and other essentials) if you can’t remain in your home while it’s being rebuilt or repaired following a disaster.
What’s not covered?
All homeowner’s insurance policies list disasters that are not covered. Here are the most common:
- flood or underground water
- earthquakes
- mudslides
- birds, rodents, insects, or domestic animals
- settling or deterioration of the home’s structure
- lack of maintenance
- mold
Liability Protection – Is it necessary?
Liability protection is an important component of a homeowner’s insurance policy, as it helps pay court costs and medical expenses if you, a family member, or a pet injures someone on your property. (It can also cover damages to someone else’s possessions while they are on your property.)
What you should know:Don’t assume that you will be fully reimbursed if a covered item is stolen or damaged in a disaster. Policies limit the amounts paid for covered items. Jewelry and computers, for example, have a low limit. As you consider policies, be sure you know exactly what’s covered and the coverage limits.
Understand how your policy calculates replacement. There are two ways to do this: actual cash value and replacement value. Standard policies calculate replacement using actual cash value.
How much does coverage cost?
Your policy premium is the amount you will pay for the policy. The cost of your premium is based on how much it would cost to replace your house. An insurance agent will consider these items to determine cost:
- appraised value of your property
- construction type (e.g., brick, wood, concrete)
- age of the building
- natural hazards in the area
- value of belongings (if included)
- any additional coverage requested (riders, earthquake coverage, flood coverage, etc.)
Don’t skimp on coverage to reduce your insurance costs. Instead, consider these tips to keep costs down:
- Ask for a higher deductible
- Insure your automobile with the same company and ask for a multi-policy discount
- Talk to your agent about discounts for installing safety features and security devices such as:
- deadbolts
- alarms
- smoke detectors
- storm shutters
- fire-retardant roofing
- Tell your agent that you have a smoke-free household, if you do.
- Ask for a senior discount, if applicable.
- Insure your home and contents, but not your land.
Is Home Inspection a must?
When you buy a house, it's critical to know that the structure itself is sound. A home inspection is a thorough examination of a property's structural and mechanical systems from foundation to roof.
It includes careful checkups of the basement, attic, walls, ceilings, doors, interior plumbing, heating, cooling and electrical systems. The work is done by an independent, state-licensed building contractor.
Some lenders require a home inspection before they will approve a loan. Buyers should demand an inspection - even if the property is new. Sellers, who want to repair any defects that could delay the sale may order a home inspection before they put their property on the market.
A home inspection is ordered after a purchase agreement has been signed and an escrow account has been opened. If the inspector, who files a general report with the escrow or closing agent, finds a defect in a particular system, a specialist, such as a professional roofer, plumber or electrician will need to be called to make the repairs.
How much does it cost?
The cost of an initial home inspection depends on the size and location of the property. General inspections range from $300 to $500.
Who pays?
The buyer pays for the home inspection as part of the total closing costs, unless a different arrangement has been made between parties before the purchase agreement has been signed.
Home Warranty Insurance
Home warranty insurance is a low-cost policy that generally covers repairs for electrical, plumbing and heating systems and built-in appliances that are not covered by regular homeowner's insurance.
What's covered?
Home warranty insurance can cover repairs if you have an unexpected breakdown in electrical, plumbing or heating systems, or trouble with built-in appliances, such as ranges, washers, disposals, whirlpool baths, as well as other mechanical systems and built-in fixtures in your home.
A home warranty policy is optional, but it benefits both buyers and sellers from surprise repair costs that are not covered by homeowner's insurance.
If you are selling, a home warranty policy can add to your selling points. Potential buyers will know that coverage is there if a system breaks down after the purchase. You are also protected if, during the closing, a problem covered by your plan occurs. Plus, if a repair is needed, after you sell your property, the new owner will call the insurance company directly (and not you).
If you are buying, you have the added security of knowing that systems and fixtures will be covered when the sale is complete.
Home warranty insurance coverage can vary by state and by contract.
How much does it cost?
The price of a typical home warranty insurance policy for a single family home ranges from $175 to $400 - depending on the size and age of the property and the amount of coverage you choose. It is far less than the replacement cost of the systems and appliances it covers. There is usually a deductible of between $35 and $50. Most basic plans, for example, will usually cover your water heater, refrigerator, washer, dryer, garbage disposal and micro-wave oven (if it is built in)
Higher-end policies can cover air conditioning, ductwork, garage door openers, pools, spas, sprinkler systems, well pumps and plumbing fixtures.
Who pays?
Generally, the buyer pays the cost of a home warranty policy; however, the seller may buy a policy for the benefit of the buyer to avoid certain liabilities that may arise if problems occur after the closing.
Coverage begins as soon as you apply for it; premiums are paid at the time you close the transaction.
What is a Survey?
There is more than one type of land survey that you may need if you are buying or selling a property.
A residential boundary survey identifies the borderlines of the property from corner to corner.
A mortgage survey is used by lenders, title companies and other parties in a transaction to determine if improvements to a property, such as driveways, sidewalks, garages, decks or swimming pools have encroached or spread across the recorded borderline to an adjoining property. Encroachment issues can delay a closing.
If you are considering buying or building on a cliff or hillside land, near a fault line or in a flood zone, you will want to be sure to ask for a Geological Report to assess potential geological hazards before you proceed. (In parts of California, the seller may be required to provide this type of report.)
What does a surveyor do?
A surveyor is a licensed engineer who stakes the boundaries of the property and creates a scale drawing that shows the location of the residence, fence lines, and any improvements that have been made to the property (patio, garage) to be sure that they do not encroach on an adjoining property.
A surveyor will also point out any established easements, access to any public right of way and determine if there are any building setback violations.
A geological engineer will review public geological surveys and map out the distance of a property to a known fault line and any other geological hazards, such as unstable ground that may be a threat to your investment.
Specialty engineers can also assess ground water and storm water management, slope instability, land fill conditions and make recommendations for water well and drainage pumping systems.
When is a survey necessary?
A boundary survey is not always required — different states have different requirements, but, if you are the buyer, it is to your benefit to know exactly how much land you are paying for. Surveyors often find defects that could lead to renegotiating the price of the property you are buying.
A fence that divides a property from a neighbor may not be built along the boundary line of the adjoining properties. The property's driveway may encroach on a neighbor's land. A neighbor may have built a deck that extends over the borderline. Issues like these should be addressed before you close a transaction.
How much does it cost?
The price of a survey is based on the service and the size of the property. It can range from $200 to $600, though the average is around $350. If a title company sends its own surveyor to define the boundaries of the property, there will likely be a separate charge for that service. A basic geological report is around $100.
Who pays?
Generally the buyer pays for the survey as part of the closing costs, unless a different arrangement has been made with the seller prior to signing the purchase agreement.
What is a Pest/Termite Inspection?
A termite inspection is performed by a state-licensed professional who is hired to look for signs of termite infestation or damage to a house or other structure before the property is sold.
A standard termite inspection is usually ordered by an escrow or closing agent after a purchase agreement has been signed, so that problems can be remedied during the closing process.
In many states, a termite clearance is a critical part of the closing process. Lenders will not approve a loan without it.
What does a termite inspector do?
An experienced inspector will make a thorough investigation of the structure (usually starting with the basement or foundation and exterior of the house to make sure that no structural wood is in contact with the soil).
Pest inspectors, who are state licensed and regulated, will look not just for evidence of termites (droppings around windowsills, wood damage, cellulose shavings on the soil near the foundation, termite tubes and tunneling in wooden beams), but also for signs of mold, fungus, wood decay, dry rot, water puddling and leak damage.
The inspector files a written report describing his findings with the escrow or closing agent usually within five to seven business days. (A copy is also filed with the state inspection board and is available to the public for two years.) The report recommends remedial work, preventive measures required to reduce future incidents and it usually includes cost estimates.
A termite inspection is usually ordered when an escrow account has been opened at the beginning of the closing process. Work to correct problems does not start until the seller signs an authorization form. The inspection service will ask for the escrow file number and include it in his report.
How much does it cost?
A standard termite inspection can cost between $75 and $500 depending on the size and age of the property. The price of remedying any problems depends on the scope of the damage and type of treatment required.
Who pays?
Typically, the buyer pays for the initial pest inspection as part of the closing costs. The seller pays for any repair work, unless both parties negotiate a different arrangement before opening escrow and note it in the purchase agreement.
