Mar 29, 2021

Understanding the Underwriting Process

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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