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

• Cannot delegate any of the escrow duties to another person.
• Cannot advertise that he or she conducts escrows unless the broker specifies in the advertising that the escrows are in connection with the brokerage business.
• Prohibited from using fictitious names or corporation names that use the word "escrow."
• Must put aside any agency relationships with the parties involved and become a neutral depository. 

The Escrow Process

Document most often used is CAR's Residential Purchase Agreement and Joint Escrow Instructions.

• Select the escrow company
• Deliver the purchase contract to the escrow holder
• Open the escrow
• Complete all items outlined in the escrow instructions
  1. Ordering inspection reports and the title search/insurance
  2. Arranging financing and property insurance
• Close the escrow - the buyer completes financing arrangements, the seller transfers the title and both the buyer and seller pay the necessary taxes, fees and other charges. 

Title Insurance - a seller is required to deliver a marketable title at closing.

• A marketable title is so free of defects that the buyer is certain he or she will not have to defend the title.
• The seller must have Evidence of title - proof of ownership of the property.
• Title insurance is paid for one time, when the property passes from one owner to another. It stays in effect until the property sells again. 

Title insurance insures the lender (and the property owner for an additional fee). The title insurance company:

• Examines all records pertaining to the property's recorded history.
• Reviews risks that might not appear in the public record.
• Helps the property owner correct any defects.
• Insures the property against economic loss.

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:

• Forgeries or acts of minors and incompetents.
• Federal estate tax liens and failure of delivery of a prior deed. 

Items not included in a standard CLTA policy include:

• Defects known to the insured but not disclosed to the title insurer.
• Easements, encumbrances and liens not shown in the public record.
• Rights or claims of persons in physical possession of the property.
• Mining claims, water rights and zoning ordinances.  

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:

• Within three days of receiving a loan application, a lender must give a copy of a HUD booklet called Settlement Costs and You to the applicant.
• Within three business days of receiving the application, the lender must give the applicant an estimate of the closing costs that would be expected in the transaction - "good faith estimate." 

Closing and Settlement Charges 

RESPA details the costs that the buyer and seller will pay at closing.

• Requires lenders to use the Uniform Settlement Statement (HUD-1 Form) to detail the costs that the buyer and seller will pay at closing.
• Gives the buyer the right to review the completed settlement statement at least 3 days prior to closing.
• Prohibits any payment or receiving of fees or kickbacks when a service has not been rendered. 

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.

• A debit is money that the buyer or seller needs to pay at closing.
• A credit is money that the buyer or seller receives at closing, either because it was already paid, it's being reimbursed or there is a promise to pay. 

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

• Buyer Expenses - mortgage recording/credit/appraisal fees, title/homeowner’s insurance, survey, PMI etc.
• Buyer Debits - contract sales price, other expenses (loan origination/closing fee/recording fees).
• Buyer Credits - earnest money or deposit and loan amount. 

Seller's Side

• Seller Expenses - broker commission, title fees, fees for preparing the deed, etc.
• Seller's Debits - loan balance, unpaid items due from seller, other expenses, such as closing fees and document preparation.
• Seller's Credits - contract sales price and items paid for in advance.  

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:

1. The lender can credit the buyer dollar for dollar for the overage, depending upon where the overage occurred.
2. The lender has 30 days to rebate any dollar amount that exceeds the lenders quote for origination or the 10% tolerance limits for third party service.