Good news: You just bought your dream home!
Bad news: You now owe $30,000 for the recent kitchen renovation, because the seller didn’t pay the construction company.
Worse news: The previous owner’s brother was a co-borrower on their loan, never signed off on the sale, and wants to dispute ownership.
When you neglect to work with a title company, these nightmarish scenarios could become your reality.
A title company is a neutral third party that researches a property’s full ownership history. Their job is to check for title defects (AKA potential problems) like existing liens, unpaid taxes, and undisclosed heirs. If the company discovers your title is clean, you can buy a title insurance policy that protects you from any past events that occurred on your property by any previous owners.
In this post, I will cover everything you need to know about title companies, including:
Let’s get started with this topic.
What’s The Difference Between A House Title And Title Insurance?
A house title, also known as a property title, isn’t a physical document. It’s a concept that designates real estate property ownership and the rights associated with it. A house’s title states who legally owns the property, as well as who has a claim to it.
Title insurance is something you buy to protect you and your mortgage lender in case potential issues come up when purchasing property. Unlike a house title, a title insurance policy is a physical document.
It’s really important to understand the distinction and importance of a house title and title insurance, so let’s dive deeper:
What Is A House Title?
When you want to buy a cup of coffee, you go to a café, pay a barista with cash or card, get a receipt, and receive your coffee. No one will debate whether the coffee you just purchased is yours. That cup of coffee doesn’t have a previous owner, nor does anyone else have ownership rights to it.
Buying property is a little different. You’re not going to be a property owner forever, so when you buy your home, you’re taking on the title. The property title establishes your rights, including:
Property titles may come with limitations, depending on what type of home you own. For example, a law enforcement officer can obtain the right to enter your property if they have a legal search warrant. Also, if you’re part of a homeowners association (HOA), you’ll probably need permission before doing any home remodeling.
What’s The Difference Between A Title And A Deed?
Titles and deeds are often mistaken for one another. However, the two have key distinct differences:
A deed is the legal document that a buyer and seller sign to solidify the transfer of ownership. The deed denotes who the buyer and seller are, and contains a property description—including where the property lines end.
Simply put, a deed is a tangible object. A title is not.
What Is Title Insurance?
When you hire a title company, they research the title to the property you’re buying to determine if it’s “clear” or has “defects.” A clear title indicates the title company couldn’t find any outstanding issues with the property. Title defects indicate the opposite.
Once the title search is complete and is deemed “clear,” you can purchase an owner’s title policy. Title insurance protects you from problems that could surface while you’re buying your home, including:
Can You Conduct Your Own Property Survey?
As a home buyer and seller, you can do your own research, but you’re only going to find what’s officially recorded. You won’t find all the title issues. In many cases, you don’t know what you don’t know.
Even if you do manage to check everything, a contractor can still put a lien on your property for unpaid work after you buy your home. If you don’t purchase a policy, that lien becomes your responsibility.
Title companies relieve you of the burden of missing something during a property survey. Also, you can’t get a policy without them first conducting a title search.
Types Of Title Insurance
There are two types of title insurance: lender’s title insurance and owner's title insurance. These insurance policies financially protect you and your mortgage lender during a real estate transaction.
Lender’s Title Insurance Policy
A lender’s title insurance policy protects your mortgage company from any title disputes that occur after the closing process. It’s highly unlikely that you will get lending services without one. Your mortgage lenders usually require the home buyer or seller to purchase the lender's title insurance. The costs of this title insurance are tied to your mortgage loan.
Owner’s Title Insurance Policy
An owner’s title policy ensures your rights as a property owner are protected, usually until either you or your heirs transfer ownership of the property.
Simply put, while a lender’s policy insures your lender, the owner’s title policy insures you. Both title insurance policies minimize risk, because the title company that issues you a policy first conducts thorough research to check for title defects.
If a title gets contested, the title insurance policy covers the legal defense fees and pays for any valid claims. Both the lender and you are off the hook for any mistakes made on the title company’s end.
Roles And Duties Of A Title Company
A title company performs many roles during real estate transactions. They act as the combined agent for all parties involved in the transaction, including the buyer, the seller, the lenders, and the insurance company. They do this by:
Let’s look at what each of these involves.
Performing A Title Search
Title companies perform a title search by diving deep into public records, legal documents, and any other relevant information available that involves your property. These searches identify any legal and/or financial claims or rulings against the current title owner that may have repercussions for you after you close on the property. If someone else has an ownership claim, or if there are unpaid taxes, it’s better to know before the transfer of ownership takes place.
The length of a title search depends on how many records need to be obtained. Older homes tend to have a lengthier history, making the process take longer than with newer homes. Once the title company examiners have all the documents they need, the search takes anywhere from hours to weeks.
Conducting A Property Survey
When issuing insurance, title companies conduct property surveys to define what actually belongs to the property. They confirm land boundaries and list any conditions or restrictions that apply to the property’s legal description. For example, if part of the driveway is encroaching on a neighbor’s property, the title company notes it.
As with a title search, a property survey helps determine if the title is clear, so they can issue you an owner’s policy.
Preparing An Abstract Of Title And Opinion Of Title
The abstract of title minimizes many risks you'll take when becoming the title owner. It’s a brief summary of the property, which helps determine if there are any claims against it. The abstract of title includes:
An opinion of title is a document from an attorney stating that you have the legal right to purchase a property based on the title search and property survey. If there are mistakes in the opinion of title, the attorney who drafted it takes on the legal responsibilities.
Holding The Money In Escrow
Once you and the seller sign a purchase agreement, having an escrow with a title company means that earnest money is deposited into the escrow account. An escrow account is a savings account that a neutral party (the title company) manages.
As the neutral party, the title company ensures that there’s enough money in the account for the required expenses, including the rest of the down payment and closing costs.
Managing The Closing Process
The title company usually manages your home’s close. Depending on your state’s laws, the title company appoints a real estate attorney or signing agent to review all closing paperwork, including the closing disclosure, which provides the final details about your loan. After reviewing, the appointed attorney or signing agent finalizes the deed and title transfer.
Issuing Title Insurance
Once the title company determines your title is clear, they issue title insurance during the closing process. The title insurance cost is a one-time fee, usually amounting in a number between .5 - 1% of the total cost of your property.
How To Choose The Right Title Company For Yourself
When you want to choose a title company, you have two options:
Getting Recommendations From Your Lender Or Real Estate Agent
Experienced lenders and real estate agents have developed a network of people and organizations they enjoy working with, including title companies.
People do business with those they like, know, and trust to get the job done. Since lenders and agents often depend on referrals, they tend to be more picky about who they work with. If they've had a bad experience with a title company in the past, they’re unlikely to recommend them in the future. Also, since they already have a relationship with a specific title company, the process usually runs smoother.
By asking and choosing a title company that your leader or agent recommends, you can save yourself time and money.
Do Your Own Research
Even if your lender or real estate agent strongly recommends a title insurance company, the choice is yours. Don’t hesitate to shop around for an owner’s policy or a lender’s policy that you believe may net you better protection or more savings.
If you decide to go this route, here are a few questions you should ask title companies:
Final Thoughts On Title Companies
A real estate transaction involves many moving parts, and home buyers end up working with multiple institutions - a title company being one among them.
So what does a title company do? They serve as the unsung heroes of a real estate transaction. They conduct title searches and property surveys to make sure your home’s title is clear. After you purchase a policy with them, they take responsibility for any mistakes they could’ve made so that you have peace of mind. If that’s not enough, they also act as a hold your money in escrow and oversee the closing process, helping you receive the keys to the next chapter of your life.To learn more about the many things a title company does, check out our post about title insurance.