For homebuyers and home sellers alike, the escrow and title process can seem designed to be deliberately mysterious. Documents filled with legal and real estate jargon can be confusing and off-putting, and novices and experienced real estate investors alike can find themselves alienated by the escrow process. To aid in your home transition, we have assembled some common escrow terms and phrases everyone should know.
A 1031 exchange is an IRS rule that allows a property investor to defer capital gains taxes if the individual sells the investment property and reinvests the proceeds from the sale within certain time limits in a property or properties of like-kind and of equal or greater value.
An appraisal is a professional evaluation of the value of a property or home. An appraiser is a licensed professional who is certified and trained in valuation. In Illinois, an appraiser must complete at least 75 hours of appraisal education and training, including 15 hours of ethics and standards of practice, and must pass an examination. In Wisconsin, appraisers are required to complete 150 hours of approved education and 2,000 hours of appraisal experience within one year, in addition to passing a state examination.
Chain Of Title
The chain of title is a document listing all previous owners of a property, usually extending back 30 years. It is researched and compiled on behalf of the buyer as part of the title search process, and all title transfers and encumbrances are summarized in a title report.
Closing is the final phase of the home ownership transfer process, in which title is transferred from the seller to the buyer.
Closing costs are fees and costs that must be paid at the closing of a real estate transaction, and usually include fees related to the origination and underwriting of a mortgage, agent commissions, attorneys fees, taxes, insurance, and record filing fees. These costs add to the property’s purchase price. Both buyers and sellers usually have to pay closing costs.
A closing disclosure is a five-page document provided to home purchasers who use a mortgage to finance their property purchase. It describes the key terms of the loan, including the property’s purchase price, loan fees, the interest rate on the loan, an estimate of real estate taxes and insurance, closing costs and other fees and costs included in the loan transaction.
Consideration is a legal term that describes any thing of value exchanged by one party for a thing of value from another party. Consideration is usually, but does not always have to be, money exchanged for property, goods, or services.
The word “contingent” refers to anything that is dependent on the meeting of a condition. In real estate, a contingency is a term inserted into the purchase contract that states that the buyer’s obligation to buy the property depends on the seller or other party (such as a mortgage lender) meeting certain conditions. Common contingencies in home purchase contracts include the inspection contingency, financing contingency, appraisal contingency, and title contingency,
A deed is a legal document memorializing the transfer of title of a property from the seller to the buyer. The deed generally contains a description of the property, including the property lines, and contains the names of both the seller and buyer.
An easement is someone else’s right to a non-possessory interest in your property. Common examples include a utility company’s right to enter your property to perform maintenance, or a landlocked neighbor’s right to drive across part of your property in order to access a public road.
An encroachment is a non-permitted intrusion onto the land or property of another. The most common form of encroachment occurs when a neighbor unintentionally builds a structure on or overhanging your property line.
An encumbrance on title is a claim or liability against a property by a third party. Common encumbrances can include mortgages, easements, and tax or mechanics liens.
A home inspection is an evaluation of a home’s condition, generally focused on compliance with applicable building codes and safety standards, or on the general condition of the home, when hired by a home buyer as a part of a transaction. An inspection may be performed by a licensed home inspector as part of the escrow process.
Lender’s title insurance, required as a condition of most mortgages, protects the lender in the event it becomes clear that the borrower does not hold clear title to the property. This insurance policy assures the lender of the priority of its security interest in the property in the event of foreclosure or a third-party claim. Lender’s title insurance is acquired at the time a mortgage is issued, and protects the lender against title defects or encumbrances incurred before the date of the policy, but unknown at the time the policy is issued.
A lien is a creditor’s legal claim to a property. A lien must be approved by a court, and can force the sale of a property if a debt is not paid. Common types of liens include mechanics liens, which can be attached to a property by contractors or tradespeople if they are not paid for work, and tax liens, which are attached by a government to recover unpaid tax amounts.
Owner’s title insurance protects you as a homeowner in the event of a prior claim against title that only comes to light after the property’s transfer. Typically, a title insurance policy will cover against issues such as liens, levies, probate claims, fraudulently recorded claims, mental incompetence of the seller, and other common defects.
Property tax is a tax levied by a governmental entity on property owned by an individual or other legal entity. Property taxes are usually paid to a local governmental entity, and used to fund schools and infrastructure. Property tax is usually assessed based on the property’s value.
Recording is the process of filing deeds and other legal documents with the appropriate county or local government agency. When a title transfer is recorded, it becomes public record and can be searched by title companies or other agencies to compile a chain of title showing that you have the right to sell your property.
A net sheet is a document that lists out what a seller can expect to receive from a property sale. It lists the sales proceeds, closing costs, and existing mortgage obligations, and provides a summary of the seller’s expected net proceeds. Using a seller’s net sheet calculator can help sellers set an appropriate price for their home.
Title can best be described as a “bundle of rights” that describe what you can and can’t do with your property while you own it. Broadly speaking, there are five important rights that are largely understood to be conveyed to residential homeowners along with title to the home:
- The right of possession, or the right to live in the home or on the associated land
- The right of control, generally described as the right to use the property in any way that isn’t against the law
- The right of exclusion, or the right to keep others off of the property
- The right of enjoyment, or the right to use your property for your own benefit or entertainment, again, within the bounds of the law
- The right of disposition, also known as the right to transfer ownership
A title commitment is a document provided to home purchasers before the sale. It constitutes the title company’s promise to provide title insurance, as well as an explanation of any terms, conditions, exclusions, requirements, and exceptions to the insurance policy. The document also identifies any specific requirements that need to be addressed prior to closing so that the title policy can be issued.
Title insurance is an insurance policy that protects the insured’s right in the event that a creditor, heir, or lienholder steps forward, even years after a sale, to enforce their rights to or against the property in question. Title insurance is backward-looking, and protects against claims that existed, but were unknown, at the time of the property’s transfer. There are two types of title insurance policies: owner’s title insurance, which protects the owner’s right to the property, and lender’s title insurance, which ensures that the mortgage lender is made whole in the event of a claim against the property.
Transfer stamps, or transfer taxes, are charges levied by a governmental entity upon the transfer of a property’s title from one individual or legal entity to another.
Learn More From Your Trusted Title Insurance Company
Have more questions about escrow? Let us know! Protecting your interests and assets during a home purchase or sale may be the most important thing you’ll ever do — and you don’t have to navigate the ins and outs of title insurance or closing alone.
If you have questions about escrow, or about what title insurance can do to protect you, what it involves, or how to get it, Landtrust Title Services can help. Please contact us today at [email protected] or by phone at 312.528.9210 to get answers to all of your questions.