Why do I need Title Insurance?

Why do you need title insurance?


To protect possibly the most important investment you'll ever make - the investment in 
real estate.


A lender goes to great lengths to minimize the risk of lending money for the purchase of real estate. First, credit is checked as an indication of the borrower's ability to repay the loan. 


Then, the lender seeks assurance that the quality of the title to the property to be acquired and which will be pledged as security for the loan is satisfactory. The lender does this by obtaining a loan policy of title insurance.


The loan policy does not protect the borrower.


The loan policy protects the lender against loss due to unknown title defects. It also protects the lender's interest from certain matters which may exist, but may not be known at the time of the sale. 


But, this policy only protects the lender's interest. It does not protect the borrower. That is why a real estate purchaser needs an owner's policy, which can be issued at the same time as the loan policy, usually for a nominal one-time fee. 


What is the danger of loss?


If the lender has title insurance protection and the owner does not, what possible danger of loss exists? 


As an example, assume real estate was purchased for $100,000. A down payment of $20,000 is made, and a lender holds an $80,000 mortgage lien, or beneficial interest. The lender acquires title insurance protecting the lender's interest up to $80,000. But the purchaser's down payment of $20,000 is not covered.


What if some matter arises affecting the past ownership of the property? The title insurance company would defend and protect the interest of the lender. The purchaser, however, would have to assume the financial burden of his or her own legal defense. If the defense is not successful, the result could be a total loss of title. 


The title insurance company pays the lender's loss and is entitled to take an assignment of the borrower's debt. The purchaser loses the down payment, other equity in the property that may have accumulated, and the property. And the balance on the note is still due!

How can there be title defect if the title has been searched and a loan policy issued?

Title insurance is issued after a careful examination of copies of the public records. But even the most thorough search cannot absolutely assure that no title hazards are present, despite the knowledge and experience of professional title examiners.  In addition to matters shown by public records, other title problems may exist that cannot be disclosed in a search.

What title insurance protects against?

Here are just a few of the most common hidden risks that can cause loss of title or create an encumbrance on title:

* False impersonation of the true owner of the property
* Forged deeds, releases or wills
* Undisclosed or missing heirs
* Instruments executed under invalid or expired power of attorney
* Mistakes in recording legal documents
* Misinterpretations of wills
* Deeds by persons of unsound mind
* Deeds by minors
* Deeds by persons supposedly single, but in fact married* Liens for unpaid estate, inheritance, income or gift taxes
* Fraud

What protection does title insurance provide against defects and hidden risks?
Title insurance will pay for defending against any lawsuit attacking the title as insured, and will either clear up title problems or pay the insured's losses. For a one-time premium, an owner's title insurance policy remains in effect as long as the insured, or the insured's heirs, retain an interest in the property, or have any obligations under a warranty in any conveyance of it.
Owner's title insurance, issued simultaneously with a loan policy, is the best title insurance value a property owner can get.

What is an Escrow Account?

An escrow account is used to collect and hold funds to pay your property taxes, homeowners insurance premiums or other charges when they become due.

The account is often established for you by your mortgage company when you take out your mortgage.  However, if an escrow account was not set up when you took out your mortgage, you may be able to do so now. 

Real estate taxes and insurance premiums must be paid regularly — typically, payments are due once or twice a year — and failure to pay these bills on time may cost you money in tax penalties or result in cancellation of your insurance coverage.

What are the benefits of an escrow account?

An escrow account helps you:

• Manage your budget: You do not have to make lump sum payments when your taxes and insurance are due. You have made monthly payments throughout the year to cover those obligations.
• Gain peace of mind: You don’t need to keep track of when your tax and insurance bills are due.  The payments will be made, on time, on your behalf.
• Ensure that your home is protected: With paid-up insurance coverage and taxes, you protect your investment in your home and meet your lender’s requirements.

Most mortgage companies require an escrow account for mortgages with less than a 20 percent down payment.

How does an escrow account work?

Your monthly mortgage payment includes an amount for property taxes and insurance in addition to the amount you owe for principal and interest.

The amount of your monthly mortgage payment that is for taxes and insurance is placed by your mortgage company into an escrow account. The funds can be used only to pay taxes and insurance on your behalf.

Your mortgage company pays the taxes and insurance bills for you when they are due. Your mortgage company examines any changes in your tax and insurance costs (for example, your local government may change the amount of your real estate taxes). Your mortgage company sends you a statement each year showing the prior year's activity — amounts collected from you and placed in escrow as well as the payments made on your behalf — and showing any adjustments that may be needed based on changes in your tax and insurance costs.   

Here is a simplified example* of how escrow payments are calculated:
Annual real estate taxes: $1,800 ÷ 12 months = $150 per month
Annual property insurance: $720 ÷ 12 months = $60 per month
Total monthly taxes and insurance: $210

So in this example, $210 would be added to your total monthly mortgage payment and applied to your escrow account. You might hear your total monthly mortgage payment referred to as your “PITI” — forprincipal, interest, taxes and insurance.

Do you have an escrow account?

If you are not sure if you have an escrow account, check your monthly mortgage account statement or contact your mortgage company.  Your account statement will typically indicate your “Escrow Balance” and the amount of your total monthly mortgage payment that is applied to escrow.

Should you establish an escrow account?

If you do not have an escrow account, you may want to establish one. Ask your mortgage company for more information.

Want more information?

For more information, talk with your mortgage company to determine if you are setting aside adequate funds in your escrow account or if you should set up an escrow account. Also, the U.S. Department of Housing and Urban Development offers "Frequently Asked Questions about Escrow Accounts for Consumers".

What is an Assumable Loan?

An assumable loan is a type of loan that a person can take over or assume. In such a situation, a person doesn’t apply for a brand-new loan. Instead, he takes over a loan that already exists. When a borrower takes over an assumable loan, he usually does not start fresh, with a new balance. He normally takes over only the current balance of the loan, and in many cases, the current interest rate.

Sometimes a person who opts for an assumable loan doesn’t have to qualify for it. This is not always the case, however, as there are also some loan programs that do require those who want to take over another person’s loan to qualify. Since some assumable loans allow the new borrower to assume the loan without qualifying, this situation is often seen as optimal for a person who has bad credit. For example, a person who has bad credit may have great trouble qualifying for a mortgage loan. If he can find a home with an assumable mortgage, however, he can take over the mortgage loan without having his bad credit impair him.

Besides taking on an assumable loan to circumvent credit problems, there are other factors that may make this type of lending situation attractive. In a mortgage situation, for example, a person who takes on an assumable loan can avoid the closing costs he would pay if he were taking on a first mortgage.

Interest rates can be a major benefit for someone who wants to take on an assumable loan. For example, an individual may want to acquire a loan for a property during a time when interest rates are high. If he can find and qualify for an assumable loan that was taken out during a low-interest period, he can pay much less interest than those who take out brand-new loans. Some lenders take steps to avoid having to offer lower-than-current interest rates when a person assumes a loan, however. Many include clauses in their terms that allow them to raise interest rates if a person assumes a loan; typically, this is referred to as a due-on-sale clause.

In most cases, taking on an assumable loan means providing some cash to the person who held the original loan or even taking out a second loan on the same property. For example, a person may take on an assumable mortgage of $80,000 US dollars (USD). If the property he purchases is being sold for $100,000 USD, however, he still has to ensure that the seller receives the full amount. In such a case, he may give the seller the rest of the money out of his savings or from another source. If this is not a possibility, he would usually have to take on another loan in order to meet the seller’s total sale price.

Do I need an Appraisal to Sell my House?

One of the most common questions people ask is, "do I need an appraisal to sell my house?" An appraisal is a professional assessment of the home's worth. It is performed by a licensed appraiser, who takes into account the property features, the market conditions, and the data on sales of similar properties. The appraiser then uses a formula to calculate the most likely worth of the home. Home sellers generally ask "do I need an appraisal to sell my house" because they believe that the appraisal will help them to determine how much to list the home for.

The answer to the question of "do I need an appraisal to sell my house" is technically NO. It is possible to price a home and list it for sale without the home being formally appraised. In order to determine how much you should ask for the home without an appraisal, you can do some basic research yourself on the Internet to find out what similar homes have sold for. Remember, when doing your own research on the Internet, the other homes that appear comparable to yours may actually have different features or be in a different condition, so any estimates you make on your home's value from this type of research should be considered estimates and not facts.

You can also ask your real estate agent what he believes the house will sell for. Real estate agents look at many properties, and seller's agents are often responsible for listing multiple properties within a given market. As a result, agents begin to learn the value of properties and are able to discern what buyers are looking for. Your real estate agent can thus help you determine the appropriate price to list your home for, without the need for you to hire a professional appraiser.

However, although you do not need to have your home appraised to sell your house, the answer to the question of "do I need an appraisal to sell my house" can be more complicated than a simple no.

While sellers do not need to have the home appraised, buyers often do. Generally, a bank will not authorize a loan until the home is appraised by an approved appraiser of the lender's choosing. The buyer pays for this appraisal, and it may be done after an offer is already made on the home. Still, since the bank will generally not provide a mortgage to the buyer if the home is found to be worth less than expected in the appraisal, technically the answer to the question of "do I need an appraisal to sell my house" can in fact be yes- you do because the buyer may be unable to make the purchase unless the appraisal goes OK.

USDA Loan Requirements

What are the USDA Mortgage Loan Requirements?



To decide if you qualify for an USDA Mortgage Loan, the following will be looked at:

• Your income and your monthly expenses. Standard debt-to-income ratios are 29/41 for USDA Loans. These ratios may be exceeded with compensation factors.
• Your credit history (this is important, but USDA's credit standards are flexible). A FICO score of 620 or above is required for all loans through most lenders.
• Your overall pattern rather than to individual problems you may have had.

To be eligible for an USDA Mortgage, your monthly housing costs (mortgage principal and interest, property taxes and insurance) must meet a specified percentage of your gross monthly income (29% ratio). 
Your credit background will be fairly considered. At least a 620 FICO credit score is required to obtain an USDA approval through most lenders. You must also have enough income to pay your housing costs plus all additional monthly debt (41% ratio). These percentages may be exceeded with compensating factors. Applicants for loans may have an income of up to 115% of the median income for the area. Maximum USDA Loan income limits for your area can be found at http://www.rurdev.usda.gov/HSF-Guar_Income_Limits.html 

Families must be without adequate housing, but be able to afford the mortgage payments, including taxes and insurance.




Can I get an USDA Mortgage Loan after bankruptcy?

Criteria for USDA loan approvals state that if you have been discharged from a Chapter 7 bankruptcy for three years or more, you are eligible to apply for an USDA mortgage. If you are in a Chapter 13 bankruptcy and have made all court approved payments on time and as agreed for at least one year, you are also eligible to make a USDA Loan application.


What are the USDA Down Payment Requirements?

USDA Mortgages have no down payment requirement. Other loan programs don't allow this.


What types of property are eligible?

While USDA Mortgage Guidelines do require that the property be Owner Occupied (OO), they do allow you to purchase condos, planned unit developments, manufactured homes, and single family residences.


What is the maximum amount that I can borrow?

The maximum amount for an USDA Mortgage Loan are determined by:

Maximum loan amount: The is no set maximum loan amount allowed for an USDA Mortgage. Instead, your debt-to-income ratios will dictate how much home your can afford (29/41 ratios). Additionally, your total household monthly income must be within USDA allowed maximum income limits for your area. Maximum USDA Loan income limits for your area can be found at http://www.rurdev.usda.gov/HSF-Guar_Income_Limits.html


Maximum financing: The maximum USDA Mortgage amount will be 100% of the appraised value of the home.

Types of Loans - USDA

USDA stands for United States Department of Agriculture.  Over the last few years USDA or Rural Housing Loan has become the hottest loan in town for most low and moderate income families.  This is because you can get a loan for 100% financing with no Mortgage Insurance.

These programs are tailored towards people who live in Rural Areas.  To determine if the house you are thinking about purchasing is in a rural area and if you meet income qualifications click on the following link:

http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do

There are two types of loans that USDA offers

USDA Guaranteed Rural Housing Loans
USDA Guaranteed Loans are the most common type of USDA rural housing loan and allow for higher income limits and 100% financing for home purchases. USDA Guaranteed Loan applicants may have an income of up to 115% of the median household income for the area.   All USDA Guaranteed Loans carry 30 year terms and are set at a fixed rate.


USDA Direct Rural Housing Loans
USDA Direct Housing Loans are less common than USDA Guaranteed Loans and are only available for low and very low income households to obtain home ownership, as defined by the USDA. Very low income is defined as below 50 percent of the area median income (AMI); low income is between 50 and 80 percent of AMI; moderate income is 80 to 100 percent of AMI.  You can click here http://www.rurdev.usda.gov/HSF-Direct_Income_Limits.html and see if you qualify for this loan.

Why choose a USDA Mortgage?

1. USDA loans require NO down payment
2. In some cases you can finance your closing costs, Seller can pay up to 6% of your closings costs so really you don't have to come to the table with ANY money.
3. There are NO prepayment penalties for USDA Rural Housing Loans.
4. USDA loans has no monthly Mortgage Insurance.
5. A USDA loan is available to all Rural areas of the country, provided a market exists for the property and the home meets HUD's minimum property standards.
6. You can use this loan to purchase a New or Existing one family home in Rural Areas.
7. No Manufactured Homes allowed unless it is Brand new (talk to your lender about this)
8. USDA loans are offered at 30 years terms with a fixed interest rate.

VA Closing Costs

The veteran can pay a maximum of all reasonable and customary amounts for any and all of the "Itemized Fees and Charges" designated by VA as defined below plus a 1% flat charge by the lender plus reasonable discount points. Some special provisions apply to construction, alteration, improvement and repair loans.

HOW TO HAVE MINIMAL TO NO CLOSING COSTS

Please note that often times veterans believe that closing costs are covered by a VA mortgage. While that is not technically true, the same effect can be reached through careful structuring of your real estate contract. The loan amount will be the purchase price or appraised value, whichever is less (plus the VA Funding Fee). So if you want your closing costs covered by the loan, you need to increase the price and have a stipulation with the seller will pay the closings costs and pre-paid expenses equal to the amount by which you have increased the price. As long as the home appraises for the increased price, you will have the closing costs paid as part of the deal. Closing costs and pre-paid expenses can vary widely with 3% - 5% as the range for most places. If you want a more specific number in this regard after you have started looking for properties, we can provide you with a Good Faith Estimate for a particular property that you have an interest.

ITEMIZED FEES AND CHARGES

The VA defines allowable fees and charges that the veteran borrower can pay or closing costs that may be charged to the borrower. These costs are determined as reasonable and customary by each local VA office. All other costs in the transaction are considered non-allowable and generally paid by the seller when purchasing a new home or by the lender when refinancing your current VA mortgage. Itemized fees and charges are as follows:

APPRAISAL AND COMPLIANCE INSPECTIONS

The veteran can pay the fee of a VA Appraiser and VA compliance inspectors. The veteran can also pay for a second appraisal if they are requesting a reconsideration of value. The veteran cannot pay for a second appraisal if the lender or seller is requesting a reconsideration of value or if parties other than the veteran or lender request the appraisal.

RECORDING FEES

The veteran can pay for recording fees and recording taxes or other charges incident to recordation.

CREDIT REPORT

The veteran can pay for the credit report obtained by the lender.

PREPAID ITEMS

The veteran can pay that portion of taxes, assessments, and similar items for the current year chargeable to the borrower and the initial deposit for the tax and insurance account.

HAZARD INSURANCE

The veteran can pay for the hazard insurance premium. This includes flood insurance, if required.

FLOOD ZONE DETERMINATION

The veteran can pay the actual amount charged for a determination of whether a property is in a special flood hazard area, if made by a third party who guarantees the accuracy of the determination.

SURVEY

The veteran can pay a charge for a survey, if required by the lender.

TITLE EXAMINATION AND TITLE INSURANCE

The veteran may pay a fee for title examination and title insurance, if any. If the lender decides that an environmental protection lien endorsement to a title policy is needed, the cost of the endorsement may be charged to the veteran.

SPECIAL MAILING FEES FOR REFINANCING LOANS

For refinancing loans only, the veteran can pay charges for Express Mail or a similar service when the saved per diem interest cost to the veteran will exceed the cost of the special handling.

VA FUNDING FEE

Unless exempt from the fee (10% minimum disability from the VA), each veteran must pay a funding fee to VA.

OTHER FEES AUTHORIZED BY THE VA

Additional fees attributable to local variances may be charged to the veteran only if specifically authorized by VA. The lender may request VA to approve such a fee if it is, (a) normally paid by the borrower in a particular jurisdiction, and (b)considered reasonable and customary in the jurisdiction. The following list provides examples of items that CANNOT be charged to the veteran as "itemized fees and charges." Instead, the lender must cover any cost of these items out of its flat 1% fee.


Loan closing or settlement fees, document preparation fees, preparing loan papers or conveyance fees, attorneys services other than for title work, photographs, interest rate lock - in fees, postage and other mailing charges, stationery, telephone calls and other overhead, amortization schedules, pass books, and membership or entrance fees, escrow fees or charges, notary fees, preparation and assignment of mortgage to other secondary market purchasers, trustee's fees or charges, loan application or processing fees, fees for preparation of truth-in-lending disclosure statement, fees charges by loan brokers, finders or other third parties, and tax service fees.


When reviewing allowable borrower fees and charges, many of the items can be paid for by the seller of the home and can be negotiable when presenting an offer on a home to the seller. Please consult with your Real Estate Professional handling the transaction.

What is a VA Loan?

The VA Loan became known in 1944 through the original Servicemen's Readjustment Act also known as the GI Bill of Rights. The GI Bill was signed into law by President Franklin D. Roosevelt and provided veterans with a federally guaranteed home with no down payment. This feature was designed to provide housing and assistance for veterans and their families, and the dream of home ownership became a reality for millions of veterans. The GI Bill contributed more than any other program in history to the welfare of veterans and their families, and to the growth of the nation's economy.


With more than 25.5 million veterans and service personnel eligible for VA financing, this loan is attractive and has many advantages. Eligibility for the VA loan is defined as Veterans who served on active duty and have a discharge other than dishonorable after a minimum of 90 days of service during wartime or a minimum of 181 continuous days during peacetime. There is a two-year requirement if the veteran enlisted and began service after September 7, 1980 or was an officer and began service after October 16, 1981. There is a six-year requirement for National guards and reservists with certain criteria and there are specific rules concerning the eligibility of surviving spouses.


VA will guarantee a maximum of 25 percent of a home loan amount up to $104,250, which limits the maximum loan amount to $417,000. Generally, the reasonable value of the property or the purchase price, whichever is less, plus the funding fee may be borrowed. All veterans must qualify, for they are not automatically eligible for the program.


VA guaranteed loans are made by private lenders, such as banks, savings & loans, or mortgage companies to eligible veterans for the purchase of a home, which must be for their own personal occupancy. The guaranty means the lender is protected against loss if you or a later owner fails to repay the loan. The guaranty replaces the protection the lender normally receives by requiring a down payment allowing you to obtain favorable financing terms.

Types of Loans - VA (Purchases)

Basic Requirements for Purchases

VA loan applicants often wonder about the eligibility of houses they’re considering getting a loan for--sometimes the concerns are about the type of property, for some VA loan applicants the concern might be over the condition of the home. For VA insured mortgages there are local ordinances, federal law, and VA requirements which must be met in order for the home to be approved for a VA insured mortgage.

General requirements and more specific guidelines cover VA loan eligibility. There are rules based on known issues--termites, flood zones and high-voltage power lines. The general requirements are simple enough to understand and provide some flexibility to the lender and appraiser when deciding if a particular property qualifies for a VA loan based on VA minimum property requirements.

The Department of Veterans Affairs requires a home to conform to some basic standards. The property must be inhabitable and provide the customary space for sleeping, cooking, and sanitation. The rules for multi-unit properties or multi-purpose buildings include VA requirements that each living unit contain “dedicated” sleeping, cooking, and sanitary areas.

VA requirements also include rules governing the condition of all typical mechanical systems found in the home. A heating and air conditioning system must be safe to operate and protected from weather and other “destructive elements”. These mechanical systems must have adequate capacity.

They must be able to function properly in the space it is installed in, meaning for example that a home can’t be equipped with a central air system that is too small for the space it must heat or cool.

VA appraisers who find problems or unacceptable issues related to these basic requirements may recommend improvements or alterations. If the property cannot be “reasonably modified” to accommodate these basic requirements, the property could be ineligible for a VA insured home loan. 

 

FHA Loans

Mortgage lending has been a quickly transforming environment within the last several years. Additional regulations and guidelines have resulted in hundreds of thousands of families that were able to buy or refinance a property just a couple years ago being unable to get approved for a mortgage loan. A growing number of home buyers are using government-insured FHA home loans because of the favorable terms that they offer, compared to other loan types.  

What is the Federal Housing Administration?

The FHA (quick for Federal Housing Administration) has been in existence since 1934 when it was founded in the course of the Great Depression. Since its inception over 75 years ago, over 37 million mortgages have been insured by the FHA in the United States. The FHA is the largest government insurer of home loans in the world today. FHA Loans have become so popular in today’s lending climate because they can be much more accommodating than other mortgages, but they do contain specific credit, income and property criteria for a mortgage to get approved. A number of the more crucial requirements are listed beneath. 

FHA Loan Income Requirements

The income verification and earnings capacity evaluation of the borrowers is an essential component of the FHA mortgage approval process because it shows the individuals capacity to repay the home loan. FHA loans utilize two separate DTI Ratios (Debt-To-Income Ratios) to determine a borrowers income eligibility. The initial ratio to be applied is the housing cost ratio (Top Ratio). To meet the Top Ratio requirements, the new month to month housing expenses can not exceed 31 percent of the borrowers total income. Housing expenses include principal and interest mortgage payment, taxes and insurance. Once it is determined that the housing ratio meets criteria for approval, the total expense ratio (Bottom Ratio) is applied. To meet Bottom Ratio criteria, the individuals complete monthly expenditures, including the new housing payment, can not exceed 43% of their total monthly income. Other expenses that are factored into the total expense ratio include credit card payments, car payments, student loans, and any other monthly payments that are to be paid. A borrowers credit report may be used to verify monthly expenses. 

FHA Loan Credit Requirements

To meet FHA loan credit criteria, the borrowers almost certainly be required to have a FICO credit score of 620 or above. The credit score used for FHA loan qualification is determined by obtaining the borrower’s scores from each of the three major credit bureaus, then eliminating the highest and lowest scores. This score is referred to as the “middle score” or “mid score”. Although the FHA has set its minimum credit score requirement at a 580 for many of its programs, individual lending institutions are free to add additional requirements and raise the minimum score as they see fit. It can be acceptable for the borrower to posses a bankruptcy in their past and still qualify, but you will find that additional guidelines will apply. If an individual possesses a Chapter 13 bankruptcy in their past, they must provide proof that all court ordered payments have been made on time for at least one year before application. If an individual has a Chapter 7 bankruptcy in their past, they must wait at least two years from the discharge date before application. 

FHA Loan Property Requirements

A home must have an FHA appraisal performed by a certified appraiser to be an acceptable property for an FHA loan. To satisfy the FHA appraisal requirements, the home must be in reasonably good condition. Certain disqualifying appraisal conditions may include but are not limited to structural problems, leaking roofs or missing exterior paint or siding. The property appraised value is extremely significant in the FHA loan process and the home must appraise for at least the purchase price. The highest FHA mortgage amount changes from county to county and metropolitan areas throughout the United States. The smallest maximum FHA loan amount in any county is $271,050, but can reach as large as $729,750 in particular high-cost locations.