Title companies help people buy, sell, and refinance real estate by examining who has ownership rights to a property. They make sure the seller has the right to transfer the property free and clear to the buyer.
A title company will conduct a title search of public records related to the property to look for any problems with the title. If the title isn’t clear, the title company will try to resolve any issues so the transaction can proceed.
What is a house title?
A house title describes who owns the property and who else has any claims or rights to it.
When you’re buying a home, you want to know that the title is clear — that no relative, contractor, or creditor can claim that they have a right to it.
You find out about these claims by performing a title search, which we’ll discuss later. But first, let’s clarify some more key terms you should know.
Title vs. deed: Understanding the difference
While the title and deed are closely related, there are a few key differences between the two terms.
In real estate, a “title” simply refers to your legal ownership of a property and your right to use it. A deed is the actual legal document proving that you own the property.
What is title insurance?
In real estate, title insurance is a policy that protects someone with an ownership interest in the property — a lender or homeowner — from defects in the title, along with any third-party claims that might arise after ownership is transferred.
For example: After taking the title to a property within an HOA, you might discover that the HOA only allows homes to be painted tan, not the blue that you’d prefer.
You want to discover these things ahead of time so you can accept them willingly or find a different home to buy.
If a restriction like this, or an ownership claim by someone else, arises after you take possession of your home, title insurance can protect you and your lender from financial losses associated with the claim, including legal fees.
There are two basic kinds of title insurance: a lender’s policy and an owner’s policy. Here’s a breakdown of the two policy types:
Lender’s title insurance
When you take out a mortgage to buy or refinance a home, you’re required to buy lender’s title insurance. Even though you pay for it, it protects the lender. It typically costs about 0.5% of the home’s purchase price.
If someone makes a claim on your property after closing on a house — and you still have a mortgage — the lender’s title insurance policy protects its financial interest (i.e., the mortgage).
An example of when a lender’s title insurance would pay out: Let’s say you’ve owned your home for a year when the ex-spouse of the person you bought the home from contacts you.
They claim that the seller didn’t have the right to sell the home and did so without the ex-spouse’s permission or knowledge. A court case ensues, and the ex-spouse wins your home.
In this scenario, you haven’t sold your home, you’ve lost it. That means you don’t have any money to pay off the mortgage. The lender’s title insurance will cover the lender’s loss. Owner’s title insurance would also come into play — should you have it — to cover your loss of equity, legal fees, and moving expenses.
Owner’s title insurance
As a homebuyer, you’ll have the option to purchase an owner’s title insurance policy to protect your own interest in the property for as long as you own the home. You can expect to pay about 0.5% of the purchase price for coverage.
In short, getting owner’s title insurance might be advisable for several reasons. It can:
- Prevent you from having to pay off previously unknown claims against your home, such as contractor’s liens
- Prevent you from losing your home to a previously undiscovered claim
- Pay your legal costs
- Cover your financial losses if the claim causes you to lose your home
An example of when owner’s title insurance would pay out: Let’s say you purchase a home from a woman who recently inherited it from her father. A month after closing, you find out the woman had a sister who also had a right to the property but didn’t give permission for the sale.
Even though you had a title search conducted before you bought the home, the will hadn’t been recorded yet, so the title company had no idea there was another heir.
If you have owner’s title insurance, the title company will pay the court costs of defending you from the undisclosed heir to help you keep your home. That doesn’t mean you’ll win, but the title insurance will cover your financial losses.
Roles and duties of a title company
A title company does more than issue title insurance. They also perform all of the research required to make sure the title is clear, which minimizes the chance that any title problems will crop up after closing.
Performing a title search
Before closing, the title company will perform a title search to look at public records related to the property. A title search tries to uncover possible issues that would prevent you from having a clear claim to the property.
When the search is complete, the title company will issue an abstract of the title. It’s a document summarizing all of the transactions affecting claims to the property, including ownership changes, tax liens, utility easements, lawsuits, and homeowners association restrictions.
Why it’s important: If the title search reveals any problems, the title company will try to resolve them so you can obtain a clear title.
If the problem is not easily resolved, the title company will let you know about it so you can decide whether to proceed with the purchase.
Conducting a property survey
A property survey confirms a home’s land boundaries, and most lenders require one. There may be one already on file, so ask your lender or title company to check beforehand. Your title company may be able to order a property survey for you.
Why it’s important: The property survey will verify where your neighbor’s property ends and yours begins. It’ll ensure that neither of you has a fence or structure that encroaches on the other’s lot, preventing legal problems down the road. If you want to add a fence, the survey will show you where you can place it.
A property survey can also reveal zoning and building restrictions that could affect your future plans for the property.
Holding money in escrow
A title company will often hold money in escrow for the lender, buyer, and seller between when you sign a purchase agreement and close the sale.
Why it’s important: The buyer will usually make an earnest money deposit of several thousand dollars to prove to the buyer that they’re serious about completing the purchase.
If the sale does not go through, the seller may be entitled to keep the earnest money. The title company will make sure this money ends up in the right hands.
Managing closing
The title company also oversees the closing process. Here’s what they’ll do after the title search is complete:
- Draw up closing documents
- Determine how much money needs to be transferred between each party
- Schedule the closing
As the buyer, you’ll sign all the closing documents in the presence of a notary, who will verify your identity and witness your signature on key documents.
You’ll wire your down payment and closing costs to the escrow company; your lender will then send them your mortgage principal.
Why it’s important: The title and escrow company will settle the transaction by sending funds to the seller and, if applicable, the seller’s lender.
The title company will also pay various third parties for the services they performed to complete the transaction.
Once closing documents have been signed by both parties, the home is yours and the title or escrow agent will file the deed with your county government shortly after closing.
Learn More: Can You Close on a House Remotely? Buying a Home Online
Providing title insurance
Title insurance is issued after closing. You will pay for it at closing; the fees will be listed on page 2 of your closing disclosure statement.
Why it’s important:
As noted earlier, title insurance protects you from defects in the title and any third-party claims that might arise after ownership is transferred.
Find out: How to Conduct a Property History Search Before You Buy
How to choose the right title company
Choosing the right title company helps ensure that your property rights are protected and that your closing goes smoothly. Title companies also help protect their customers from wire transfer fraud during the closing process.
As a homebuyer, you have the right to choose your own title company. Before settling on a company, be sure to do the following:
1. Get recommendations from your lender or real estate agent
You don’t have to choose a title company at all. Your lender will likely have a preferred title company that they work with. However, if you ask, your lender must give you a list of title service providers in your area.
Your real estate agent may also be able to recommend title service providers that have a good reputation.
2. Do your own research
You can also shop around for title service providers on your own. Here’s what to look for:
- How long they’ve been in business
- What kind of reputation they have
- How much they charge for title insurance
- Whether they offer a discount for purchasing an owner’s title policy in conjunction with the required lender’s title policy
- Whether they can also provide your escrow and closing services, and how much those services cost
Some title companies have fee calculators on their websites to give you an idea of what you might pay for their services.
Tip: The American Land Title Association also has a useful search tool that can help you find title companies in your area.
