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CH 10 - 2
Terms in this set (29)
In the early days of California, title insurance did not exist. Land
holdings were large, and population was sparse. Property frequently
was transferred simply by the delivery of a symbol in the
presence of a witness.
As population and migration increased, land holdings were divided
and sold to incoming strangers.
Boundaries became confused,
and it was difficult to identify ownership. To combat this
confusion, when California became a state in 1850, the legislature enacted recording statutes.
These recording statutes created depositories
(namely, the county recorder's office) to collect and file title
documents for public use.
Soon the recorder's offices became too
complex for many laypeople to use. Specialists called abstractors
began searching and compiling courthouse records. For a fee,
these abstractors would publish their findings on a specific parcel
To protect the public, the need arose for a system to guard
against the errors, omissions, and incorrect judgments that abstractors
might make. This need for additional assurance led to the concept
of title insurance.
Today a title insurance policy insures the ownership of land and
the priority of a lien (deed of trust, contract of sale, and so on)
subject to the encumbrances revealed in the title examination.
The owner and/or lender is assured that a thorough search has
been made of all public records affecting a particular property.
(See Figure 10.2.)
Types of Title Insurance Policies
Title insurance policies are divided into two basic groups, the
standard policy and the extended-coverage policy. The standard
policy is the most widely used and can be divided into three
1. Standard owner's policy, which insures the owner for the amount
of the purchase price
2. Standard lender's policy,which insures the lender for the amount
of the loan
3. Standard joint protection policy, which co-insures the owner and
lender under one policy
The standard policy is frequently referred to as a CLTA policy.
CLTA stands for California Land Title Association, a state trade
association for title insurance companies.
Included in the standard coverage policy is the assurance that
title is free and clear of all encumbrances of public record, other than the items revealed in the title examination and listed as exceptions
in the title policy.
Under the standard policy, the title company
does not make a physical inspection of the property and
therefore excludes from coverage unrecorded items that could affect
For example, unrecorded easements are excluded, as
well as the rights of parties in possession other than the owner,
such as tenants or squatters.
Also excluded from standard policy
coverage are violations of environmental laws, zoning and other
government ordinances affecting the use of the property, non declared
assessments, and some items regarding mining and water
The extended-coverage policy was originally established for real
This policy requires the title company to make a
physical inspection of the property and insures against certain unrecorded
title risks excluded under the standard policy.
cases, the extended-coverage policy is requested and issued to
homeowners, but not to other types of property owners. The
extended-coverage policy is commonly referred to as an ALTA
ALTA stands for American Land Title Association, a national
trade association for title insurance companies.
How Much Does Title Insurance Cost?
Title insurance premiums, like most other types of insurance premiums,
are calculated based upon the dollar amount of insurance
Owners' title policies are issued for the purchase price of
the property, whereas lenders' title policies are issued for the loan
Therefore, owners of more expensive property pay higher
title fees than owners of less expensive property. Title fees are established
by title companies themselves, not by any government agency.
Competition keeps rates between title companies comparable.
Unlike other forms of insurance (such as automobile, fire, and
life insurance), which require annual premiums, a title insurance
fee is paid only once.
The title policy stays in force as long as the
owner retains title to the property. A new title insurance policy is
required by the lender; otherwise, the lender will not make the
loan on the property.
Who Pays for the Title Insurance?
The payment of the owner's policy fee is a negotiable item between
the buyer and the seller. However, in different geographic areas, the method of payment varies.
In some areas, it is customary
to split the title fee between the buyer and the seller. In some
areas, the seller normally pays the title fee; in others, the buyer
pays. The lender's policy title fee is almost always paid by the
Who Decides Which Title Insurance
Company to Use?
This is another negotiable item between the buyer and the seller.
The usual custom is for the party paying the title fee to select the
As discussed above, real estate regulations prohibit a
real estate agent from dictating which title insurance company to
use. If the real estate agent should happen to have a financial interest
in the title company selected, the agent must disclose this fact
to the buyer and the seller.
10.3 CLOSING COSTS
Closing costs refer to the expenses paid by the buyer and the seller
upon the sale of property. Some people attempt to estimate closing
costs by using simple rules of thumb, such as "3 percent of the
sales price" or some other rough figure.
However, rules of thumb
are not accurate. The only sure way to determine actual closing
costs is to list and price each individual item.
The payment of the closing costs is a negotiable topic between
the buyer and seller. No law requires that certain closing costs are
the responsibility of the buyer or the seller.
The only exception
deals with some government-backed loans where regulations prohibit
the buyer from paying certain closing costs. However, by custom,
certain closing costs are typically paid by the buyer, and other
costs are usually paid by the seller.
Buyer's Closing Costs
A buyer's (borrower) closing costs can be divided into two categories:
(1) nonrecurring closing costs, and (2) recurring closing costs.
Nonrecurring closing costs are one-time charges paid upon the
close of escrow.
Recurring closing costs are prepaid items that the
buyer pays in advance to help offset expenses that will continue as
long as the buyer owns the property.
Nonrecurring Closing Costs Usually
Paid by the Buyer
1. Loan origination fee. A fee charged by a lender to cover the expenses
of processing a loan.
The fee is usually quoted as a percentage
of the loan amount. For example, a 1% loan fee for a
$300,000 loan would be 1% times $300,000 equals $3,000 loan fee.
2. Appraisal fee. A fee charged by an appraiser for giving an estimate
of property value.The fee for a simple appraisal varies throughout
the state, with $350 or more being a typical charge for a single family
residence. Appraisal fees for income properties such as
apartments and office buildings are considerably higher.
3. Credit report fee. Before a lender grants a loan, the borrower's
credit is checked at a credit agency.The credit report usually costs
from$40 to $60.
4. Structural pest control inspection fee. A fee charged by a licensed
inspector who checks for termites, fungus, dry rot, pests, and
other items that might cause structural damage. For a home in
an urban area, the fee is usually $75-125.
5. Tax service fee. Afee paid to a tax service company that, for the life
of the loan, each year reviews the tax collector's records.
borrower fails to pay property taxes, the tax service company reports
this fact to the lender, who then takes steps to protect the
loan against a tax foreclosure sale. This fee usually runs from
$50 to $80.
6. Recording fees. This covers the cost of recording the deed, the
deed of trust, and other buyer-related documents.Most counties
charge $10 to $15 to record a single-page document.
7. Notary fees. Signatures on documents to be recorded must be
notarized.Notary public fees are set by law.
8. Assumption fee. A fee paid to a lender if the buyer "assumes" the
loan, that is, agrees to take over and continue to pay the seller's
9. Title and escrow fees. Buyer's responsibility in buyer-pays areas,
areas where it is customary for the buyer to pay the title and
Recurring Closing Costs Usually Paid
by the Buyer
1. Hazard insurance. A one-year premium for insurance against
fire, storm, and other risks.
The minimum coverage is the amount
of the real estate loan, but buyers are advised to purchase greater
amounts if they make a large down payment toward the purchase
price.Many owners purchase comprehensive homeowner's
2. Tax proration. In California, the property tax year runs from July
1 through June 30 of the following year. If the seller has prepaid
the taxes, the buyer reimburses the seller for the prepaid portion.
Prorations are discussed in detail in Chapter 6.
3. Tax and insurance reserves. This is also known as an impound
account or trust account. If a buyer's (borrower's) monthly
loan payment is to include taxes and insurance, as well as
principal and interest, the lender sets up a reserve account.
Depending on the time of the year the date taxes and insurance
are due relative to the date escrow closes, a lender will want
the buyer to prepay one to six months of taxes and insurance
premiums into this reserve account.
Once an adequate reserve
account is established, tax and insurance bills are forwarded to
the lender for payment. At the end of the year, adjustments
are made to assure that adequate amounts are in the trust fund
for the next year.
4. Interest due before the first loan payment. Interest on real estate
loans is typically paid in arrears. For example: Escrow closes
September 15 with the first loan payment due November 1.
payment due November 1 covers the interest due for the month
of October. How is the interest from September 15 to September
30 collected? It is collected in advance at the close of escrow and is
called prepaid interest.
If escrow closed on the first of the month,
there would be no prepaid interest if the first payment was due on
the first of the following month.
Seller's Closing Costs
The closing costs paid by a seller are one-time, nonrecurring expenses.
After the close of escrow, the seller is divested of ownership and, therefore,
has no recurring expenses attached to ownership such as property
taxes and hazard insurance.
Remember that the payment of a particular
closing expense is negotiable between the buyer and seller. The
following list is merely a guideline to closing costs usually paid by
the seller as the result of custom and/or agreement.
from page 308
Closing Costs Usually Paid by the Seller