In the real estate world, we often reference underwriting requirements, underwriter approval, and underwriting review. Many buyers and sellers don’t understand what underwriting means or how much it affects their transactions. Let’s pull back the curtain for a peek at that mysterious thing we call underwriting.
Underwriting is
a sophisticated decision making process that involves interpreting data to
determine if a company will take on a financial risk. The underwriter’s job can
include conducting research, investigating details and weighing the known risk
factors to determine if insurance coverage or a loan will be issued.
Types of
Underwriters
With the
possibility of sounding like Bubba from Forrest Gump, there are
different kinds of underwriters. There are mortgage underwriters, homeowner’s
insurance underwriters, life insurance underwriters, health insurance
underwriters … and title underwriters.
Your
mortgage underwriter will verify your income, assets, debt, and property
details in order to issue final approval for your loan. Your homeowner’s
insurance underwriter will determine the insurability of the property and how
much to charge you for insurance. And we’ve got title insurance underwriters
too.
How Title
Underwriting Works
Before a
sale is officially closed and title insurance is issued, a property must go
through the underwriting process. This is a vital component of a real estate
transaction because we cannot complete the sale without this due diligence. A
title agent cannot waive requirements or make special provisions to offer you
insurance without the consent of the underwriter.
A title
insurance underwriter is responsible for checking title to the property to
ensure ownership, rights and compliance with Texas real estate laws. They
evaluate your property’s history and the title company’s research of the chain
of title, looking for anything that could present challenges with ownership
and/or owner’s rights.
The
underwriter also looks for common issues like liens or judgments attached
to the property, legal description errors, deed mistakes, unreleased
marital rights, rights of heirs or minors, etc. To ensure a clear title, issues
like boundary disputes, divorces, probate proceedings, adverse possession,
bankruptcies, and more must be addressed to determine the significance of risk.
Furthermore,
the underwriter must review and disclose anything that would be an exception to
the title insurance policy. These include issues that could affect the owner’s
use and enjoyment of the property such as easements, encroachments, rights of
way, survey matters, and restrictions.
After
evaluating the title risk, the underwriter may seek ways to mitigate a risk, if
possible, and will ultimately decide whether to insure the title to the
property. We all want to protect a buyer from closing on a property that does
not have clear title.
An
underwriter authorizes the title company to write the title insurance policy,
assumes the financial risk and insures the property against insurance defects.
The title insurance underwriter will then legally defend the property owner if
any undetected issues arise with the title. In simple terms, the title company
sells the title insurance policy and the underwriter determines whether they
should and will sell that coverage.
A title
company may have one, two, or several underwriters. The title company must meet
strict standards to qualify to write title policies with an underwriter. I work
with nine different underwriters and each has a slightly different approach.
Title
companies and underwriters are cautious because a simple mistake can lead to
paying out thousands of dollars on a title insurance policy. Every title
insurance policy carries a risk that the customer will file a claim — a
potential loss to the insurer.
Title
companies must be diligent and knowledgeable to comply with state and federal regulations
and to also conform to their underwriter’s standards. Avoiding claims and
issuing marketable title is the goal of every title company.
If you are
purchasing a property, make sure you are selective about your title company and
their title insurance underwriter. Not all title underwriters are alike. As a
buyer, you have the legal right to select the title company you want.
Have someone you feel is dedicated to your best interests.
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