The Role of a Real Estate Title Company
As if real estate wasn’t confusing enough. When you think you have a handle on all the professionals and the organizations, along comes someone or something else to let you know there’s always more to learn.
When you are a first-time home buyer, one of those items is what a title company is and what they do in a real estate transaction.
A title company is a third party hired by a mortgage company to ensure that a home’s title is clean with no encumbrances. They provide research, confirm the identification of the property owner a buyer is purchasing, and manage the closing.
A real estate title company conducts a title search. Title searches ensure the seller has the legal right to sell the property without title issues.
The search also shows unpaid taxes, real estate liens, or other problems the buyer should know about.
A clear title is a requirement for a real estate transaction to go through properly.
Mortgage lenders require a title search to protect their interests and give the new owner peace of mind that there are no title defects.
On some occasions, the title company may also act as the closing and escrow agents. Let’s examine everything a title company does for buyers and sellers.
The services of a title company provide comfort to all parties that the closing process will go off without a hitch,
What is a Title to a Property?
Before we cover what a title company does, it will be vital for you to understand what a title is and is not. Your title is not your deed which people often confuse.
The title is a document that says you have ownership rights to the property. When you are part of the title, you’ll also sign documentation related to the mortgage, whether you are on the loan or not.
In states with community property rights, you may have to sign the documents whether you’re on the title or not because ownership rights are passed to a spouse.
Some states may allow you to waive your spousal rights if you want to keep your house separate during the marriage.
On the other hand, a deed is a legal document signed at closing to transfer the property from one person to another. The title and the deed are two essential documents that will be signed for a home sale to occur.
First Steps in What a Title Company Does
When you begin looking for a new home, it’s reasonable to assume they have ownership rights.
Unfortunately, before using title companies was standard, some people would sell homes that they either did not own at all or against which there were liens, additional mortgages, or other legal issues.
In addition, some owners may have sold their property without knowing there were issues. In every case, the buyer and the buyer’s lender were out of pocket.
Enter the title company.
A title company extensively searches public records of the home you wish to buy. Doing so is referred to as a title search. Title companies will oversee what’s known as the chain of title, which is the complete history of a home’s ownership.
You might look at this as a search on the history of a house. The title company does this to ensure the seller has the legal right to sell the property and that no full or partial claims could affect your ownership.
A title company does due diligence to provide the mortgage company and property owner with a clear title. Like a home buyer does real estate due diligence, so will the title company.
It is always possible the review of the property’s history could reveal untold problems. Without a detailed search of public records, issues will likely go unnoticed.
In today’s real estate world, property titles are reviewed thoroughly.
A Title Company Will Generate a Preliminary Title Report on a Property
When escrow is opened on a particular home, a preliminary title report will be generated. The title report will include the owner’s name, the legal description of the property, and any listed exceptions to the title policy.
An escrow officer will be assigned to the file and will be able to answer any necessary questions.
Title Companies Look For Unpaid Property Taxes
Property taxes are not attached to the person living in a home but to the property itself. It is then the responsibility of the legal owner to pay the taxes.
If you were to buy a home where the current owner had unpaid property taxes, once the house became yours, the debt would also become your responsibility.
This is one of the significant reasons why purchasing a home at auction can be troublesome. You essentially inherit all warts associated with the property.
A title company will inform the mortgage company if there are unpaid taxes related to the property.
Title Companies Research Unpaid Homeowner Association fees
When you purchase a condo or a townhouse, it is almost a certainty there will be an HOA you’re buying into. Homeowners must pay fees for landscaping, insurance, and other amenities such as swimming pools and tennis courts. The HOA fees cover the use and maintenance of such amenities.
Each homeowners association has different rules, so it is always essential to read through those rules and regulations before making a legally binding offer on the home. On occasion, it is possible a home seller has not paid their HOA dues.
There may not be an issue in some cases, but in others, you may find the debt falls to you, or the HOA holds up the sale until the current owner settles the debt.
Special Assessments Are Possible
When an HOA does not have enough money in its reserves to cover a significant expenditure, it will levy a special assessment. This is a one-off amount that each member of the HOA must pay.
Although some special assessments may be small, even just a few hundred dollars, they have been known to run to $50,000 per person or even more.
If you purchase a home during the process when an HOA levies a special assessment, you could find yourself with an unpleasant surprise payment. Doing your due diligence as a home buyer is a critical exercise.
When buying a condo with a homeowners association, it’s essential to ask many questions.
The Title Company Could Find Legal Judgments
When the title company looks over the property’s title, they could discover outstanding issues such as unpaid debts.
In some situations, when a homeowner has a judgment against them in court and does not make their required payments, a lien will be placed against the property.
This means that if the home is sold, the current owner must pay off the money owed via a judgment before the sale can be completed or at closing. This creates complications that can delay or even entirely scupper the deal.
The Title Company Could Discover Other Legal Issues
It is not unknown for a title search to turn up; a forgotten will that changes the legal ownership of the property, previously unknown mineral rights, unknown or undisclosed heirs, deeds with mistakes that affect the property, and many, many more issues.
What Does The Real Estate Title Company Do Next?
Once the initial search is complete, the real estate title company may ask for a survey of the property to be carried out. The land survey will ensure the property’s boundaries are where you believe them to be and that the structures on the land are entirely within those boundaries.
As part of this property survey process, the company will also check if any neighboring properties encroach on the property you wish to buy. They will also check to ensure that no part of “your” new property encroaches on that of the neighbor.
If any encroachments exist, the real estate title company will look to see if the infringement has been previously identified, whether any easements have been agreed upon between the existing owners, and what impact this may or may not have on your ownership and enjoyment of the property.
Not all properties require this step, and not all real estate title companies commission a survey. If a survey of your property does not take place, your title company will go straight to the next step.
Title Companies Obtain The Abstract Of Title
Once all of the research information has been obtained, and the real estate title company is happy, they have discovered everything there is to know, they will issue what is known as an abstract of the title.
The title abstract summarizes everything they have found during their title search. It contains the basic history of ownership and any issues that may have been discovered.
This abstract is a “first draft” of the official title information issued so that the home sale can move forward.
Why?
Most lenders will not move forward until they are reassured that there is a free and clear title on the home in question.
Not only that, but no potential buyer wants to pay for house appraisals, home inspections, and all of the other home-buying costs only to find out at the end of the process that they will not be able to close because of a title issue.
The Abstract of Title ensures the sale moves forward before issuing the full Title Opinion Letter.
A Title Company Formulates The Title Opinion Letter
Once the real estate title company has issued the Abstract of Title, they will do some final double-checking, wait for confirmations or copies of documents, etc. and then issue a give Opinion Letter.
This letter is legally binding and confirms, for all parties, the information found in the title search. It usually contains the same information as the Abstract.
Title Insurance Is Vital in Real Estate Transactions
Once the Title Opinion Letter is issued, the real estate title company will also issue title insurance.
A title insurance policy protects the buyer and the lender should any legal proceedings arise around the ownership of the property in the future as a result of something missed by the title company.
There are two types of title insurance policies. They are a lender’s policy and an owner’s policy. The lender’s title insurance policy is a requirement and must be paid for whenever a home loan is granted.
Owner’s title insurance is optional but highly advisable. If you speak with any attorney practicing real estate or Realtor, they will tell you how valuable an owner’s title insurance policy can be.
The owner’s title policy is a one-time fee that covers you for as long as you own the property.
When you think about the potential problems that can be avoided in the future, the cost of title insurance is relatively cheap in the grand scheme of things. If you opt for the owner’s title insurance, it will be rolled into your closing costs.
I would highly advise any buyer always to purchase title insurance. Not having title insurance could result in severe financial losses.
Who Are The Major Title Insurance Companies?
The title company will underwrite and issue title insurance. A title company will assign the title insurance company.
There are several major title insurance companies, including the following:
- First American Title Insurance Company
- Chicago Title Company
- Fidelity National Mortgage
- Old Republic Title Company
- Stewart Title Company
- Land Title Guarantee Company
Several smaller regional companies write insurance policies. The above companies are the largest and trade on the NY stock exchange. Having a reputable title company in charge of your transaction is vital.
If you want to hire a title company nearby, you may want to search online. Searching for a title company near me should prove helpful.
How Much Will Title Insurance Cost?
The cost of a lender’s policy averages around $550 nationally. If you choose to get an owner’s title insurance policy, the average price is $850. Putting these two title insurance premiums together, you are looking at spending an average of $1400 to have title insurance.
Several factors can influence title insurance costs, including the loan amount and house purchase price. A larger mortgage would mean a more substantial insurance claim if there is a title problem.
Title insurance premiums can also be affected by your location, whether you have a good credit score or not. The cost of the title insurance will appear on the closing disclosure, along with other legal fees, loan terms, monthly payments, etc.
You should also see it on previous loan documents given by your lender.
What is a Title Insurance Committment?
A title commitment is the title companies blessing that they will issue a title insurance policy on the subject property being purchased. The title process will be complete at this point. Your new home’s title should be clean.
Other Things a Title Company Does
While all real estate title businesses will conduct title searches, some companies will take on additional roles during purchase. The other things a title company does include the following:
The Title Company Can Be The Escrow Agent
Your title company may also act as the escrow agent for the sale. In this role, the company will open, monitor, and maintain the escrow account into which the earnest money will be deposited.
The earnest money deposit will ensure the buyer cannot withdraw from the sale without proper reason and take their earnest money, leaving the seller high and dry. Typically, if there is a dispute between the parties, an escrow agent must hold the funds until a mutual resolution is reached.
Deposit disputes are usually aired either through an arbitration process or the courts. In some states, the real estate broker representing the home seller will hold the deposits, not the title company.
It is also possible the seller’s real estate attorney will hold the escrow deposit as well.
In these circumstances having escrow companies involved is avoided. The funds are duly accounted for at the real estate closing as part of the HUD settlement statement.
Title Companies Might Be The Closing Agent
Real estate title companies are frequently engaged to act as the closing or settlement agent for a sale.
In this role, the real estate title closing company will appoint one person from the company to serve as the closing agent.
This person is a neutral party and is responsible for the following:
- Organize the closing meeting(s) at the appropriate time in the sales process.
- Compiling all relevant sale documentation and distributing copies to all parties before the closing meeting.
- Confirming the financing details of the sale with the lender.
- Receiving all payments and documents involved in the sale.
- Ensure all non-financial agreements between a particular buyer and seller are adhered to.
- Ensuring payments are distributed correctly to the right people at the proper time.
- Obtaining all the signatures on the sale documentation and distributing copies to all parties.
- Registering the new deeds and other applicable items at the land registry office.
It makes sense for many real estate title companies to provide these services. They are already involved in the sales process, will have become familiar with the details of the sale and the people involved, and will have already produced much of the paperwork.
If the title company you choose does not act in any other capacity, they are still responsible for registering the new title deed at the land office.
To do this, they will liaise closely with your escrow and closing agents to ensure documents are available before closing and that the new deed is registered correctly.
Some States Use a Real Estate Attorney For Title Searches
It is essential to note that some states do not use title companies to evaluate whether a title is clean. Instead, the buyer’s lender assigns the title to be checked by an appointed real estate attorney. The attorney does the title “run down,” just like a title company would.
Quite often, the buyer’s attorney and mortgage company attorneys are one, and the same legal firm assigned to the file protects the buyer’s interest in the property.
Typically, a title search will go back fifty to sixty years to ensure no defects.
Is Using a Title Company Mandatory?
Using a title company or a real estate attorney is required when there is a mortgage lender involved in the transaction. However, when it is a cash sale, nothing stops a buyer from not having a title company involved.
Who Chooses The Title Company?
A title company is typically assigned by the lender granting the mortgage. However, a buyer is not obligated to use the selected title company and could choose someone different.
What Happens When a Title Company Discovers a Problem With The Title?
When title issues are discovered, all the parties in the transaction, including the buyer, seller, and lender, will be notified. The title company will then work toward rectifying the problem.
Sometimes a claim against title insurance is needed to close on a property and indemnify the new owner.
Final Thoughts on Title Companies
As you can see, there is much more to a real estate title company than carrying out a quick search. They are a critical piece of the property sales puzzle, protecting the interests of both buyers and sellers during one of the most stressful and financially significant times of their lives.
Hopefully, the information shared on what the title company does will be helpful in your home-buying journey.
Other Helpful Real Estate Resources
- What’s the difference between contingent and pending – in real estate sales, several terms can confuse buyers and sellers. Two such terms are “pending sale” and “contingent sale.” See the factors that distinguish these two real estate statuses.
- How to avoid walk-through issues – when buying or selling a home, the final walk-through is essential to complete the transaction. Look at the excellent information on preventing problems before you go to the closing table.
- Minor improvements equal significant returns – investing little money into your property can translate into substantial returns when selling a home. Also, investing some money will make your property sell more quickly.
- Why is selling for sale by owner so difficult – many folks try to sell their property without a real estate agent. Doing so is certainly not easy. The success rate is meager. Find out why in this informative article.
- What to know about real estate appraisals – when buying and selling real estate, the appraisal is an integral facet. See some helpful advice on what you need to know about the appraisal process.
These resources offer excellent advice when buying or selling your next home.
About The Author: Geoff Southworth wrote the above article on what a title company does. Geoff is the creator of RealEstateInfoGuide.com, the site that helps new homeowners, investors, and homeowners-to-be successfully navigate the complex world of property ownership.
Geoff is also a real estate investor of 10 years and has had experience as a manager of a debt-free, private real estate equity fund and a Registered Nurse in Emergency Trauma and Cardiac Cath Lab Care. As a result, he has developed a unique “people first, business second” approach to real estate.
