Introduction
Purchasing a home is often the largest single investment that a person will make. During the home buying process, a consumer engages the services of several different companies. This process is often referred to as the real estate closing.
The DC Department of Insurance, Securities, and Banking (DISB) manages the licensing and regulation of title insurers and insurance producers (agents) whom you will encounter as you complete your purchase. You may encounter the following terms as you progress through the transaction: title insurance, title agency, title insurer, settlement agency, title and escrow closing company, and closings. This guide will focus on title insurance and seeks to explain the role of these companies in the home buying process.
What is title insurance and why do you need it?
A title policy is an insurance policy you purchase from a title company licensed and authorized to sell title insurance. There are two types of title insurance: owner’s insurance and lender’s insurance. Title insurance protects owners and/or lenders from financial expenses that may occur if issues arise after a real estate settlement.
Prior to the purchase of your home, you will be asked to sign an agreement with a title agency. The title agency will conduct a title search of land records and other public documents by using a title examiner (also called an “abstractor”). The purpose of this research of land records in the county or city courthouse is to document the ownership history of the property, uncover potential issues and provide a title report. The title report will identify all prior owners, outstanding liens, encumbrances, encroachments, rights of way, easements, and similar attachments to the property. This report is required before a title insurance policy is issued.
It is essential to identify potential issues before a buyer decides to complete a real estate purchase. This is because issues that were identified in the title search will generally be excluded from coverage under the title insurance policy. The report provides the buyer with this critical information regarding the issues that need to be resolved before the property is purchased.
The title policy is issued when ownership changes from the seller to the buyer, also commonly referred to as “transferring title.” This transfer takes place at settlement, at which point all title issues should have been resolved.
In rare instances, a title search will not identify every issue. Examples of such issues can include hidden defects in prior deeds or errors in the real estate transaction, improperly recorded documents, inheritance claims, fraud, forgery, liens, encroachments, easements, and other items noted in the title insurance policy. If an issue arises after the purchase of the home, the title insurance policy will cover court costs and attorney fees incurred when addressing any claims. However, a title policy generally will not cover problems that were created by the owner after purchase, an undisclosed issue of which the owner had knowledge, and other defects that arise outside of the scope of the policy.
Who is protected by title insurance?
Real estate purchases are generally expensive and therefore require financing. Accordingly, most buyers will borrow funds from a bank, savings and loan, mortgage company, or another type of lender. These lenders are granted a secured interest in the property. To protect their interest, a lender will require that a lender’s title insurance policy be purchased by the buyer in an amount equal to the mortgage loan.
A lender’s policy only protects the financial institution if a valid claim arises. If an unknown title defect comes to light after the purchase, the lender’s policy would protect the interest of the financial institution in the property up to the amount of the outstanding mortgage. However, this protection does not extend to the owner; it is recommended that a buyer purchase an owner’s policy.
An owner’s title insurance policy protects the owner against title defects that arise after the purchase of the property. This coverage is obtained at the time of purchase and issued at settlement. The amount of insurance coverage usually equals the purchase price of the property. The policy will not cover increases in the value of the property.
How do I purchase a title policy?
A title insurance policy is paid for at the time of closing through a one-time charge. The title insurer may be providing an owner’s or lender’s policy depending on the financing of the purchase. The title insurer appoints a producer, also known as a title agent, to underwrite the coverage on the title of the property. The buyer chooses a company to run the title search and that company will issue the title policy. The rate for title insurance is a formula based on the value of the property.
Please note that title insurers are required to file and receive approval for policy rates, rules and forms from DISB.
What is settlement or closing?
The settlement, or closing, is when the buyer and seller sign all required documents, money to pay closing costs is transferred and, finally, ownership transfers from seller to buyer by deed. This includes the accounting of the transaction, safeguarding escrow, collecting, and disbursing of monies in accordance with the terms of the contract and lender closing instructions. The closing costs include fees charged by a lender, the title company, attorneys, insurance companies, taxing authorities, homeowner’s associations, real estate agents, and other closing settlement related companies. After settlement, the deed will be sent for recording in the county or city in which the property is located. These steps are critical to the successful transfer of ownership from the seller to the buyer.
Who conducts a closing?
Prior to, or at the time you submit an offer to purchase a property, you will be asked to identify a title company to handle your real estate settlement. As stated previously, this company will be responsible for extremely important steps in the purchasing of your property.
This process may be handled by a settlement agency or settlement attorneys. You may also have a closing done by a title and escrow closing company. These firms operate very similarly to a settlement company. The only appreciable difference is that a title and escrow company may have the capacity to hold many different types of escrow accounts, not just those used in real estate transactions (also those used in court requests, rental disputes, construction draw agreements etc.).
How do I choose a closing company or settlement agency?
You should shop around and select a company that is reputable and charges reasonable rates. It is important that you conduct due diligence and compare closing/settlement charges/fees from different companies. Ask for a breakdown of settlement fees and if you qualify for a reissue rate. Your research can begin as early as your home search. Closing costs and fees can vary significantly between companies. These fees are separate from the cost of purchasing the title policy.
You should also research whether a title company is locally owned and operated. A local title company may be more intimately familiar with a local real estate market and the corresponding title laws in a particular jurisdiction in which you are seeking to purchase a property. You might also ask if the title company belongs to a professional association that requires compliance with best practices.
Additional information regarding buying a house and settlement procedures can be found on the Consumer Financial Protection Bureau’s web site at consumerfinance.gov. This web site provides helpful information regarding loan options as well as the closing process. Please review the Know Before You Owe/Mortgages section under Consumer Tools prior to applying for a loan and choosing a settlement or title agency.
Be Aware
Your real estate agent or broker may suggest or recommend a title insurance producer at a specific company, but you are not required to hire that company. In some instances, there may be an “affiliated business arrangement” between the real estate agent and the title insurance producer. If one of these arrangements exists, it must be disclosed to the buyer in writing prior to closing. The federal Real Estate Settlement Producers Act (RESPA) requires this disclosure, and you should receive an Affiliated Business Arrangement Disclosure before you proceed with the services of a title company. RESPA prohibits kickbacks and referral fees for parties involved in real estate settlements.
At all times in the process, it is your right to select your title company for your transaction. At no point should you be pressured, coerced or required to sign an agreement with a company not of your choosing.
Filing a Complaint
As the District’s insurance regulator, DISB assists consumers in understanding their rights and enforces the rules and regulations insurance companies must follow. If you believe that there were issues with your title company or settlement agency during a closing on a property located in the District of Columbia, please contact DISB’s Consumer Services Division to file a complaint either online at disb.dc.gov/complaints, in person or by mail at 1050 1st NE, Suite 801, Washington, DC 20002.
If you have questions about whether your title agency or agent is licensed to conduct business in the District of Columbia, you can call DISB’s licensing division at (202) 727-8000 or follow the link for verification disb.dc.gov/page/verify-licensed-insurers.
Glossary of real estate terms and matters to consider in the closing and settlement process:
Affiliate Business Arrangements - Real Estate companies and agents may establish business relationships through entities called Affiliated Business Arrangements (e.g. LLC). Consider asking if a title company is owned by or has a financial arrangement with lenders, real estate firms or builders. The Real Estate Settlement Procedures Act (RESPA) law requires that title companies disclose their affiliations and their affiliates’ charges and fees. Be aware that you should be given a copy of this agreement before or during the property purchase. It is important to understand what the settlement fees and affiliations are to make a more informed decision. Research the affiliated business agreements to ensure you are not charged a more expensive fee for the settlement services provided to you.
Closing protection letter - A closing protection letter is issued by a title company and ensures that the firm will protect its client from any mistakes made by the title agent who handles the escrow accounts associated with the transaction. Consider asking if a closing protection letter is available for the buyer. Closing protection letters protect your earnest money deposit and escrow funds during the settlement process.
Earnest Money Deposit (EMD) - Often referred to as a “good faith deposit”, an earnest money deposit is the initial funds that a buyer is asked to put down once a seller accepts the buyer’s offer. It shows not only that the buyer is serious about buying, but that they are also willing to put their money where their mouth is.
Escrow: An escrow account is a bank account that is operated by a settlement agency or title company. This account will hold the money that a buyer transfers in order to complete the purchase. For example, the earnest money deposit will be placed in this escrow account and neither the buyer nor seller can touch it. After the purchase is completed, the escrow account is used to pay any fees and costs required after closing.
Membership in professional association - Consider asking if the title company belongs to a professional association. Generally, membership in a professional association is indicative of a company following the industry’s best settlement, accounting, and data security practices. Membership requires these entities to offer a more controlled and safeguarded transaction.
Reissue rate - A reissue rate or credit is when a title insurance company agrees to cover or provide title insurance protection for the same piece of property that they have previously covered. In order to receive this rate or credit, proof that a previous title insurance policy was in place on the property must be provided. Consider asking if a title insurance reissue rate is available from the seller’s title policy when purchasing an owner’s title policy. Having a reissue rate can save hundreds in closing costs.
Title Report – A title report reveals any issues with a title that need to be dealt with by the seller in order to deliver a clear title. It gives details such as ownership history, liens and easements. The title company gathers this report by searching existing property records at the county recorder’s office. This report is required for a title insurance company to issue a title insurance policy.