This is part two of Qualia’s industry training series. For part one of the series “Title Industry Basics: What Do Title and Escrow Companies Do?” click here.
One of the main functions of a settlement agency is “clearing the title.” This process takes considerable investigative work. The title professional works to determine whether there are any issues that must be resolved in order for a homebuyer to take ownership of the property.
Today, there are tools that are automating many parts of the title clearing process; however, skilled and detail-oriented professionals are needed to problem solve on the variety of issues that may be discovered during the process.
Conducting a title search
In order to close on a property successfully, the title professional and their team of in-house or outsourced contractors will first need to gather information on the title. The first step in the title clearing process is a title search or title exam. During this process a title abstractor will pull all historical documents relevant to the ownership of a property from the recording office. This search could range from digital records to filing cabinets.
The abstractor will use the documents they’ve uncovered to put together the history of the title, known better as the chain of title. It includes the previous owners and where in the county records their deed was recorded.
The title abstractor will review the chain of title to uncover any potential title issues. They then return the chain and results of the title search, including any title issues, to the settlement agency.
Uncovering title issues
During the title search process, the abstractor will uncover any title issues. These are called title defects or clouds on title and are issues that could prevent the new owner from enjoying full, unopposed ownership. A title search uncovers issues such as liens and easements.
A lien is the most common type of title issue. It’s a form of security interest granted over an item of property, used to secure the payment of a debt or performance of some other obligation. Examples include:
- Mortgage lien: This is the most common type of lien, in which a lender owns part of the property until the mortgage is fully repaid. This usually includes the seller’s lender who needs to be repaid for the mortgage the seller took out when they originally purchased the property.
- Tax lien: If property taxes are not being paid, the government can own part of the property until the tax debt is repaid.
- Judgment lien: If an individual loses a lawsuit and is responsible for monetary damages, this lien could be placed on their property until they no longer owe those damages.
- Mechanic lien: If an individual contracts a vendor to perform improvements to the property but then does not pay for those services, this lien enables the vendor to own part of the property until the debt is repaid.
Easements establish a legal right to cross or otherwise use someone else’s land for a specified purpose. For example:
- Your property is on a lake and the neighbor across the street must pass through your property to access the lake.
- The property behind yours needs access to your private road in order to get to the public street.
Once that the settlement agency has a clear picture of all title issues with the property, they’ll document them on the title commitment.
The 3 sections of a title commitment
After the title search, the settlement agency will structure the results in the title commitment. It’s a special document that outlines the terms of the insurance once the transaction is complete. It’s also an official commitment or promise to issue the final title insurance policy after closing.
Because the title commitment is an official underwriter document, it’s structured in a specific way. The following are sections of a title commitment document.
1. Schedule A
This gives details about the property and parties being insured, including:
- The property address
- The property’s parcel ID, a unique number given to every property by the government
- The legal description identifying the particular parameters of a piece of a property
- The type of policy to be issued
- Who is to be protected by those policies
Think of requirements as a list of title issues found during the title search which must be resolved before title insurance (and the final policy) can be issued. A mortgage lien is an example of a requirement; the existing lender would have to give up their claim on the home (by having their mortgage paid off) before the title is cleared.
Another list of title issues, specifically ones that were found during the title search that will not be cleared (and therefore will not be covered) by the final title insurance policy. An easement is an example of an exception. There is no hope of resolving an easement and the buyer and the lender are comfortable with it not being covered by the title insurance.
Once the settlement agency drafts their title commitment, they will send a copy to the lender and any other parties who need to review it.
After the title commitment, the settlement agency works to clear the title by resolving any issues listed in the title commitment.
The curative period
After the title commitment is issued, The settlement agency will set out to resolve the title issues listed in the requirements section. This is often called the curative period because the title or escrow company is “curing” the title of any issues.
There are many ways that title issues can be resolved — here’s an example using the most common title issue: a mortgage lien.
Let’s say a mortgage lien from the seller’s previous mortgage is found in the title search. The settlement agency will need to:
- Contact the lender holding that lien. This is almost never the same lender that is providing the mortgage for this transaction; this lender is referred to as the payoff lender.
- Inform this payoff lender that the mortgage is being paid off
- Secure an agreement from the payoff lender to release their claim to the property when they are paid the balance of the mortgage
Any title issues that are not resolvable can be moved into the “exceptions” category in the final policy, meaning that this issue will not be covered by the title insurance. Here’s an example:
Let’s say a mortgage lien from 1912 is found in the title search. The settlement agency attempts to reach out to this payoff lender but finds that the bank holding this mortgage lien went out of business. Since the business holding the lien is no longer in operation, it would not be possible to clear this title issue.
At the end of the curative period, requirements will either be resolved or they’ll be reallocated to exceptions on the final policy.
After the curative period, the title professional’s next step is to issue the final policy. This is an important milestone in the closing process and one that we’ll discuss in the next part of this series.
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