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Buying or selling a home isn’t as simple as exchanging money and signing a few documents. There are also property rights that need to be transferred from the seller to the buyer. That’s where a title company comes in.
“Title” is a legal term that includes all of the rights, uses and privileges associated with ownership of a property. So what does a title company do? When a property is being sold, it conducts a title search and offers settlement services to help close the transaction. It also provides title insurance to the home’s new owner and the mortgage lender. Here’s what you need to know.
What is a title company?
A title company (you may hear it called a title search or title insurance company, depending on the extent of their services) is an independent party involved in a real estate transaction. It is separate from the lender, the buyer and the seller.
During home sales, a title company is primarily responsible for transferring the property rights from one owner to the next, and clearing the path for the process to proceed, explains Justin Nepola, a real estate attorney in Hollywood, Florida. “They make sure there are no encumbrances on the home’s title and that the seller is the legal owner of the property,” he says.
Typical title-company services include:
- Title search (identifying the true owner of the property)
- Holding escrow funds
- Doing property surveys
- Uncovering encumbrances
- Issuing title insurance
- Preparing closing statements/overseeing the closing
What does a title company do?
First and foremost, as its name implies, a title company ensures that the home’s title is clear of defects, or things that could impact the buyer’s use of the home. Here are some common title defects that a title company can root out and help you fix, according to Patti DeGennaro, a former chief implementation officer for Title Alliance, Ltd. in the Pittsburgh area:
- Restrictions, such as rights of ways and easements
- Fraudulent transfers
- Unknown heirs
- Prior unpaid taxes
- Prior mortgages
- Wake-up court judgments
To check for these and other issues, the title company performs a search of public records or transaction history for the property and its title. The company also verifies who has the title to the property, as well as the “quality” of that title (ie, whether it’s “cloudy,” as opposed to being owned free and clear).
“This is important to ensure that the buyer is taking actual title to the property from an actual property owner or someone who is authorized to convey title on behalf of a property owner, such as through power of attorney or an estate,” says Rajeh Saadeh, a real estate attorney in Bridgewater, New Jersey. These services are often ordered by a real estate attorney on behalf of a buyer, instead of by the buyer directly, he says.
Title companies also assist during the closing process by providing settlement services, such as facilitating escrow or document notarization or recording the deed with the county, says Ben Heller, a real estate attorney with Los Angeles firm Zweiback, Fiset and Zalduendo.
“Settlement services commonly involve the title company acting as a neutral third party to assist buyers and sellers in closing the transaction, or the title company can be enlisted by the buyer and seller to help conclude a loan transaction,” Heller says.
Lastly, title companies offer title insurance that protects the mortgage lender if title issues surface, and also potentially the buyer, depending on the policy. Imagine, for instance, if you bought a home but later learned that someone had a legal claim to the property due to a court settlement that had not been disclosed to you. Scenarios like this can come back to haunt you if you lack title insurance.
How much do title company services cost?
Title services may vary state by state. The cost often depends on the extent of the services required, such as if probate or foreclosure searches are needed, says Saadeh. Costs usually start around $1,000, but can exceed $1,500.
One cost in particular that depends heavily on your state is title insurance (more on this topic below). The cost of title insurance is usually regulated by a state’s Department of Insurance, which ensures that the cost to you is the same no matter which title insurance company you choose — although what you pay will depend on the coverage amount you select. Typically, title insurance costs come to $1,000 for an owner’s policy and $1,000 for a lender’s policy.
Who pays? The buyer or the seller?
Again, the answer will vary depending on what state you’re located in. “In most states, the buyer pays for title services and title insurance,” Saadeh says. However, closing costs such as this are often negotiable. The buyer and seller can negotiate who will pay for these services, or even whether the costs will be split between them both, before the sale contract is signed.
What is title insurance?
Issuing title insurance is one of the most important functions a title company serves. “Title insurance is the only form of insurance that insures the past up to the present day,” Nepola says. “It’s a one-time fee that protects the owner for as long as they own the property.”
There are two kinds of title insurance policies:
- Lender’s policy: A lender’s title insurance policy “protects the lender against any title defects that may affect the security of the mortgage loan,” says DeGennaro. “This policy is based on the amount of the mortgage, and it decreases as the mortgage is paid off.” Virtually all mortgage lenders require this type of policy.
- Owner’s policy: An owner’s title insurance policy is not always required, but it’s strongly recommended to homeowners as a way to safeguard against any future claims to the property. “Even if the lender has a title policy, the buyer still needs an owner’s title policy to protect his or her interests,” DeGennaro says. “Coverage lasts as long as the buyer or the buyer’s heirs have an interest in the property.”
If any issues are found with the property’s title, it’s important to make sure they’re dealt with immediately. Title problems can lead to the closing being delayed, and in a worst-case scenario, they could lead to the entire deal falling through. If your title company finds issues, be sure to consult with a real estate attorney about resolving them as soon as possible.
How to choose a title company
Title companies are often recommended by the buyer’s real estate agent, lender or real estate attorney involved in a particular home sale. But you are not required to select the title company referred to you. Two of the biggest title companies nationwide are First American and Fidelity National, but there are also many state and local companies out there.
“Ask around for multiple recommendations, and spend time researching and speaking with each company,” says Nepola. “Find out their rates and all the fees charged, and check online reviews carefully.”
Be sure the company you choose is licensed and accredited in your state. In addition, prepare to ask questions, such as:
- How long have you been in business?
- Who is your underwriter?
- How much liability insurance do you have?
- What is your ratio of title claims to customers?
- Have you had any claims?
- How do you protect against escrow fraud?
- What are some challenges you’ve encountered during title searches, and how did you resolve them?
- How long will the title search process take, and who will be conducting the title search?
- How much title insurance coverage do I need and why?
“Try to choose a title company based on the answers to these questions, as well as its customer service, reputation and familiarity with other professionals involved in the transaction — including and especially your real estate attorney,” says Saadeh.
As with most steps along the homebuying journey, a local real estate agent can help guide you when searching for a title company. Ask your agent for recommendations or experiences they’ve had with different companies, both big national players and smaller local operations. Your agent can also help you decipher the company’s findings once their title search is complete.
A lender’s title insurance policy is almost always required when you’re financing your home purchase with a mortgage. You can optionally purchase an owner’s title insurance policy to protect yourself from losses caused by title defects.
In most situations, the buyer of a home is responsible for paying for the title insurance, which gives them the choice of company to work with. In some cases, sellers might help pay for title insurance and take a role in helping choose the company.
There is no federal law mandating you use a title company or buy title insurance, but mortgage lenders will almost always require it. It’s also just a smart idea: Policies are inexpensive when compared to the price of a home and provide valuable coverage.