What is Title Insurance?
Title insurance protects homeowners and lenders in the event that something was wrong with the title and the buyer did not actually get the clear title they thought they were getting. For instance, the property could be encumbered by a judgment lien or mortgage or some other claim to the property, there could be multiple owners with a claim to the property, back taxes could be owed on the property, the property could be encumbered by an easement, there might be errors in the property survey regarding the boundary lines on the property, or a neighboring landowner might have erected a fence or other structure that encroaches on the property. A party might even try to fraudulently convey property for which they don’t have legal title.
A title search is supposed to uncover any clouds on the title or other irregularities like those discussed above, but a title search doesn’t always reveal every title defect. In the event a homeowner has a defective title, title insurance will cover the costs to clear the title or pay damages for loss incurred because of the defective title.
Why do I need Title Insurance?
If you are getting a mortgage from a bank or other lender to purchase your home, the lender will require you to purchase title insurance to protect their interest. This is called lender’s title insurance, and it can be used to pay the amount owing on the mortgage in the event something was wrong with the title. As a homeowner, you might also consider purchasing owner’s title insurance to protect your own interest. You might have paid as much as 20% (or more) of the purchase price as a down payment, and the longer you own the home, the more equity you build up in it. If a title defect is revealed down the line, you could lose that down payment and any additional equity you have created. Owner’s title insurance will protect your financial interests if you bought defective title.
How Should I take Title, and what are my different options?
There are many different ways to hold title that can impact your right and obligations to co-owners and limit how you can encumber or transfer the property in the future. Make sure you understand the way title is being conveyed, and talk to your title agent or real estate lawyer if you are unclear or want to explore different options for holding title to the property.
If you are holding the property together with another person, such as a spouse, the most common way to hold title is a joint tenancy, also called a joint tenancy with a right of survivorship (JTWROS). In a joint tenancy, each party owns an equal and undivided interest in the property. If one party dies, the other party assumes sole title to the entire property without having to go through probate or take any other action.
Another way to hold title is by tenancy in common. Tenants in common also hold title jointly, but with specific percentages of ownership to each party, as opposed to an undivided interest as is the case with a joint tenancy. The percentage can be equal (50/50) or split up any way the parties decide. Each tenant in common can encumber or transfer their share of the property. However, if they encumber their portion of the property (with a mortgage or lien, for instance) and can’t pay their obligation, the other tenant or tenants would have to clear that encumbrance to sell the property.
A third way for couples to hold title together is as tenants by the entirety. This method is only available for married couples and treats them as one person under the law. It is similar to a JTWROS in that if one spouse dies, the surviving spouse takes sole ownership without having to go through probate or take other legal action.
There are other ways to hold title as well, including for single persons, corporations, partnerships or trusts. It’s best to speak with an attorney or other advisor if you are unsure about the best way to hold title in your particular circumstances.
Why do I need to wire my funds on the date of closing instead of bringing a check?
At closing, documents are signed and title to property is transferred from one party to the other. Since everything happens at one time, you want the funds transfer to take place at this time as well. Even in today’s world of electronic financial transactions, it still takes several days for checks to clear and funds to get transferred from one person’s bank to the other’s. A wire transfer is more immediate, so it is the preferred method.
The title company facilitating the closing can help make sure the wire transfer is done correctly so you know that the funds are going to the right place. Aries Title can facilitate a wire transfer with your bank by providing you with the appropriate instructions.
Can I pay Cash?
Cash to close includes closing costs (3-6% of the purchase price) plus the down payment on your mortgage (3-20% of the purchase price). Cash to close therefore amounts to several thousand dollars and could be as much as a quarter of your purchase price. This total is a significant amount in any real estate transaction.
Payment by wire transfer only. Cash is not preferred unless it is only a nominal amount, and neither is payment by personal check, credit card or debit card. Your lender might not even accept cash.
Talk to your title company well in advance of closing if you plan on using cash to see if this will be acceptable. You want to show up to closing ready to close with sufficient funds in the proper format.
How Much Will my Closing Cost be?
A long list of items goes into closing costs, including application fees, appraisal fees, attorney fees, credit reports and credit monitoring fees, inspection costs, mortgage insurance, tax service, title insurance, and more. Typically, you can expect your closing costs to be between three and six percent of the purchase price. Buyers generally pay most or all of the closing costs, but this is something that can be negotiated as part of the overall transaction.
You should receive a closing disclosure statement at least three days before closing that lets you know what your closing costs will be. This way, you can be sure and bring enough money to closing as well as get answers to any questions you have about closing costs before your closing date.
“Cash to close” refers to the amount of money you’ll need to bring to closing. This includes closing costs as well as your down payment on your mortgage if you have not made that payment prior to closing. These costs will be offset by any deposits or credits you have, such as your earnest money deposit, any costs the seller agreed to pay, or credits the lender offered as part of securing your loan.
How much is title insurance?
Title insurance in Florida currently costs $5.75 per $1,000 for the first $100,000 and goes down from there. For amounts between $100,000 and $1,000,000, the cost for insurance is $5.00 per $1,000. Title insurance is $2.50 per $1,000 for amounts between $1,000,000 and $5,000,000, and $2.25 per $1,000 for amounts from $5,000,000 to $10,000,000. For amounts over $10,000,000, the cost of title insurance is $2.00 per $1,000.
For example, on a million-dollar property, the title insurance would be $5,075 ($575 for the first $100,000 at $5.75 per $1,000 plus $4,500 on the remaining $900,000 at $5.00 per $1,000).
Depending on the type of property and mortgage, title insurance endorsements and recording fees can add another several hundred dollars, as can the title insurance settlement fee. These costs together might add another $1,000 or more to the total cost of title insurance.
What are Tax Prorations and why are they calculated at closing?
The buyer starts paying property taxes on the closing date, which is likely to occur after the tax year has already begun. These taxes are prorated so buyers only pay their appropriate share of taxes.
Property taxes in Collier County are calculated from January 1 – December 31. Where in this cycle your closing will land determines if the taxes are paid in advance or in arrears. The Collier County Tax Collector gives a discount if you pay them early (in advance); that discount rate starts in November, and the percentage of discount decreases each month that passes. After December 31st they are being paid in arrears and then will become past due in April of the following year if they have not been paid off by April. If your closing lands at a time of year when the tax bill has not yet been calculated by the collector, then we use the previous year’s tax rate to provide the prorations reflected on the settlement statement.
Each county is different depending on what the tax collector has set in place for their calculation rates.
What is per diem interest?
Per diem interest is a daily charge incurred by the seller for the mortgage on the property. To ensure the payoff doesn’t get rejected by the bank for being shy any amount, we add five days of per diem interest into the payoff estimate provided by the bank. Any overpayment is refunded to the seller.
What is FARBAR?
FARBAR is a collaboration between the Florida Association of Realtors and The Florida Bar. Together they created a standard contract for residential real estate transactions, the “AS IS” Residential Contract For Sale And Purchase that is used throughout Florida.
What is NABOR?
NABOR is the Naples Area Board of REALTORS®. They provide programs, services and tools to local real estate agents as a benefit of membership, including an MLS covering Southwest Florida, an electronic lockbox system, member events, meeting rooms and more. NABOR also features a consumer-facing website (www.naplesarea.com) of property listings that gets over 60,000 unique visitors each month.
NABOR has developed its own contract for residential real estate transactions in Collier County which is widely used in Collier County and differs from the FARBAR contract in significant ways, including language regarding which party pays for title insurance.
What is an estoppel?
An estoppel is a signed statement that attests to or certifies certain facts related to a real estate transaction. An estoppel letter is sometimes required by the buyer or lender as part of their due diligence. For instance, the seller may be required to certify that an encumbrance on the property has been paid off. Some of the types of estoppels we request include estoppels in relation to homeowner’s associations, condo associations, master associations, mortgage payoffs, lien payoffs, IRS payoffs, and special assessments.
What are Documentary Stamps and Transfer Taxes?
The Florida documentary stamp tax, also known as documentary stamps or transfer taxes, is a tax tied to the transfer of an interest in real property. The tax is levied on certain documents, such as deeds and mortgages. Currently in Florida (outside of Miami-Dade County), the tax rate on deeds is seventy cents per one hundred dollars of the purchase price. For a real estate purchase of $100,000, the documentary stamp tax would be $700. At $500,000, the tax is $3,500, and for a million-dollar property, the transfer tax would be $7,000.
All parties to the transaction are obligated to pay the tax. Which party actually pays the tax can be subject to negotiation between the parties when negotiating the deal. Typically, the documentary stamp on the deed is the seller’s expense, while the documentary stamp on the mortgage is the buyer’s expense. The documentary stamp tax on mortgages is thirty-five cents per one hundred dollars.
What are Recording Fees?
Real estate transactions must be recorded with the county to create an official record of ownership and chain of title. Of course, the government charges a fee to register or record the transaction. For example, recording fees in Collier County are currently $10.00 for a single-page instrument plus $8.50 for each additional page. Along with the documentary stamp tax, recording fees are part of the “closing costs” that must be paid by the buyer or seller. The title company collects these fees and takes care of the filing and recording with the appropriate government office. Each county is different.
What is a 1031 Exchange?
Section 1031 of the Internal Revenue Code allows property owners to defer the capital gains tax they would realize when selling investment property if they reinvest those proceeds in another similar property. This is known as a 1031 like-kind exchange.
The tax deferment in a 1031 exchange only applies to business or investment property. Primary residences, second homes, and vacation homes don’t qualify.
What is a Qualified Intermediary?
Accomplishing a 1031 exchange is a complicated matter, but the tax savings can be significant. A Qualified Intermediary is a professional hired to complete the necessary transactions in a way designed to meet the requirements of section 1031. The Qualified Intermediary (QI) acquires the property from the taxpayer, transfers it to the buyer, and collects funds from the buyer. The QI then uses those funds to acquire the replacement property from the seller and transfer the property to the taxpayer.