Title Insurance and why it is Important
This is the first of a series of articles on “Title Insurance”, why such insurance is necessary, and a few stories on what can happen both with poorly managed closings and a lack of understanding by some of all of the parties involved.
The term “Title” describes someone’s legal rights to own, and ultimately, sell, a property. In Colorado, as part of the process of buying a home, or more properly, “real property”, a buyer will ask that a Title Insurance Company perform a title search on the property a buyer wants to buy. At the conclusion of that search, the Title Company will provide a Title Commitment. More about that later. As part of the Contract to Buy and Sell Real Estate, the buyer may request the seller provide that commitment, and pay the costs associated with providing the buyer with a Title Insurance Policy after the transfer of property, or closing.
In Colorado, it is generally true that Title Companies, or Title Agencies perform the escrow closing in addition to searching the title for defects and issuing the Title Policy, although there are independent escrow agencies that can perform the escrow function.
There are two forms of Title Insurance, the Owners Policy, and the Lenders Policy. It is generally true that the buyer of a property buys a Lenders Policy if the buyer is obtaining a mortgage loan. The Lenders Policy protects the Lender against title defects; the Owners policy protects the new owner after the transfer of the deed, or real property closing.
Over the next few posts we will “walk” through the title and escrow process of a real estate transaction in Colorado:
But first let’s start with some definitions:
Title Commitment –
A document provided to the buyer, seller, and related professionals that stipulates the conditions necessary to enable the insurance underwriter to issue a title insurance policy after the transfer of deed.
Title Insurance Policy –
Issued by insurance carrier after the transfer of deed, or closing, that insures the new property owner against claims that might be made against the property because of a defect in the chain of title.
Title Insurance Carrier –
Also known as the “underwriter”, or “company”, this is the entity that actually issues the policy, and will defend and pay claims made against the property.
This may be an independent agency, or a company owned agency that acts as the retail supplier for the carrier or underwriter. In Colorado, most agencies also perform the escrow closing function.
Escrow Closing –
The act of obtaining all of the documentation necessary to pass title from the Seller to the Buyer. This will include a title commitment, water transfer and home owner’s association documents, lender payoff information, new mortgage loan documents, deed preparation and other documents and functions necessary to transfer or sell the property. The Escrow or Title Officer also acts as a clearing house for the funds being transferred from buyer to seller.
In our next post, we will discuss the title committment, and the importance of the Title Policy.
-Larry McGee, Broker
The Berkshire Group