Bringing you rate news….. Interest rates are up, not only in mortgage loans, but also in IRS underpayments. It’s now 6% compounded daily for individuals. Yep. Can’t escape death, taxes and interest rates. https://www.irs.gov/pub/irs-drop/rr-22-15.pdf
YOU HAVE QUESTIONS, WE HAVE ANSWERS!
VIVA ESCROW Q & A SEGMENT
(Real questions sent to us – verbatim!)
Title insurance? Exceptions? When new construction gets in the way of lender underwriting requirements.
Background:
New construction on the property, 90 day Mechanic’s Lien period is still in effect but escrow has to close. Buyer’s new lender is concerned that mechanic’s liens filed after the escrow is closed will affect the priority status of their new Loan. Lender wants assurances that the title policy will insure against any such liens.
Mechanics liens are a Seller responsibility and Title Companies will require an Indemnification Agreement that Seller would continue to be responsible for these liens if escrow closes within the Mechanic’s Lien Period. This was done in this transaction and the Title Company then issued an updated preliminary title report which stated that any issues regarding mechanics liens would be omitted from the final title policy.
The lender got the updated prelim, but their request, which is my topic for this month, is as follows:
REQUEST / QUESTION:
Lender underwriting condition: “Property documentation indicates it has had recent construction on the property. Title company to acknowledge it is aware of the construction for insurance policy underwriting and final Lender Policy will include insurance for Mechanic’s Liens from this completed work.”
RESPONSE / ANSWER:
Title Company’s response: “For clarification purposes, title is fully aware of the recent completion and mechanic’s lien period which does not expire until ___________. These matters have been addressed and we are providing full loan policy coverage as per the lender requirements”.
Escrow Response: “The Seller has already given the Title Company the Agreement that they will Indemnify the Title for any mechanic’s liens that might be filed, and because of this indemnification, there will no longer be an exception to the title policy for mechanic’s liens. So the prelim shows that exception removed.”
The same request from Lender was received for a number of days.
Escrow Final Response: “It seems that there is a misunderstanding as to the concept of the Title Policy. The original exception in the preliminary title report regarding mechanic liens was removed. That means the final lender’s policy WILL NOT have an EXCEPTION of coverage for Mechanic’s Liens. That means that if there should be any mechanic liens that were not taken care of before we record your new loan, the Title Company will honor the final title policy that your loan stands in first position. They will go to the Seller to recoup any loss based on the indemnity agreement Seller signed. If you want the policy to “include” insurance for Mechanic’s Lien then maybe you are looking for specific endorsements to the ALTA lender’s policy?”
With this final response the matter was settled with Lender’s underwriting and we went on to the next issue they had.
EDUCATIONAL MOMENT:
Why is this important?
Whether you are a Buyer, Seller, Borrower, or Lender, all parties should know what the title policy is, what is a preliminary title report, and what an “exception” to this report means. My Back to the Basics series has a Title Insurance video that might help.
In short, the title policy is the end product insurance that details the ownership as agreed to by Buyer/Borrower/Lender and as listed on the preliminary title report (prelim). Title Company will insure and cover against any after closing issues that come up that are not listed in the policy.
To get to that end product, we have the prelim, the precursor to that final title insurance report. This prelim will state the ownership and details affecting the property at the time of the transaction. The items listed on it are exceptions that the final title policy report will not provide insurance on. In order to provide insurance, that item has to be cleared and the exception eliminated, removed or omitted from the final policy.
For instance, as a simple example, if the prelim has an item stating there is an encroachment by the neighbor on the property, this item is an exception. If that encroachment is not handled and removed at closing, it will become an exception on the final title policy and there will be no insurance coverage. If problems arise after closing regarding this encroachment, the title company will not have anything to do to help the owner resolve the issue.
On the other hand, if the prelim never showed this encroachment, then it will not be an exception and will not be listed as one in the final title policy. If problems arise due this encroachment, the title company will have to help the owner resolve the issue at that time.
Here is the important tip: When you are the Buyer or Lender of a property, review the prelim closely and make sure each item aka “exception” on it is something that you can agree to live with when you take ownership or make the new loan.
Here is our “Back to the Basics – Title Insurance” educational video:
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~ Video of the Month ~
When elephants come to dinner
(video viewing starts around the 1:00 mark)
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~ Quote of the Month ~
“You do not need a parachute to skydive.
You only need a parachute to skydive twice.”
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You would think this escrow tip needs no emphasizing?
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You Have Questions? We Have Answers!
Juliana Tu, CSEO, CEO, CBSS, CEI, SASIP
“Escrow is my FOREMOST language!”
Advance Disclosure:
The opinions expressed in this blog are solely the author’s.
Your comments and viewpoints are always welcome.
Info @ VivaEscrow.com