When you buy a piece of real estate, a title company makes sure the seller has a legal right to sell the property and that the buyer isn’t purchasing a home with outstanding taxes or mortgages on it. In other words, the title company is responsible for the legality of a real estate purchase.
What is a title company?
A title company is a firm that researches legal ownership claims on real estate. Title companies come into the homebuying process after an offer has been made and the property is under contract. They work to protect the buyer from fraud by making sure there are no outstanding liens or mortgages on the house so the buyer can be confident in their purchase.
When you purchase real estate, it’s essential to be aware of any liens (old debts secured by the home), omitted heirs (those who should have inherited the home but didn’t), mistakes in the public record and other title issues.
For instance, imagine you buy a foreclosed home. Without a proper title search, there’s no good way to know if there are any liens on the property. If there are, you would be responsible for paying them since you are the property's current rightful owner.
What does a title company do?
The term “title” refers to legal ownership of a property.
Title companies do more than you might expect. They perform title research and property surveys, issue title insurance and provide other services related to title search and title insurance. The title insurance company sends a closing protection letter (CPL) to the lender that protects against fraudulent activity or errors by contracted closing agents working on the mortgage. This is a standard part of any real estate transaction.
Perform title searches
Title companies search for past titles to make sure all handoffs have been legal. The title search looks for items like outstanding mortgages, liens on the property and overdue property taxes. It also ensures utilities are up to date. Ultimately, this is to make sure no one will ask the buyer to settle a debt they aren’t responsible for and didn’t know existed.
There are many issues that can affect your title. Title searches can reveal problems such as forgotten wills, defective deeds, previously unknown land mineral rights and invalid court proceedings. Some of the most common title issues discovered during a title search include:
- Errors in public records
- Unknown property liens
- Missing or undisclosed heirs
- Forged documents
- Boundary disputes
Issue title insurance
Title insurance protects the buyer and the lender if there's ever a dispute over who legally owns a property. It guarantees that no one else has a legal claim to a particular property.
Title agencies issue two types of policies:
- Owner’s title insurance: Owner’s insurance is for the homeowner and protects them against certain title issues. An owner’s policy isn’t required but can protect your financial investment in the property.
- Lender’s title insurance: Lender’s title insurance protects the mortgage company from issues and is paid for by the buyer. Most mortgage lenders require you to buy a lender’s title insurance policy to protect the amount they lend.
Conduct property surveys
Most of the time, lenders require a property survey to establish property lines and boundaries. The survey will also point out any issues that may arise, like a neighbor’s fence over the property line. According to the American Land Title Association (ALTA) and the National Society of Professional Surveyors (NSPS), a land title survey can include:
- Boundary lines
- Access points
- Water features
- Improvements and structures
- Plottable recorded documents (easements, utility rights, etc.)
- Historical monuments
In what’s called a survey reading, the inspector notes structures on the premises, such as fences, sheds or decks. Title companies also conduct survey inspections. During a survey inspection, the title agency sends someone to observe the property in person. The state of the property is then compared with the survey notes to look for discrepancies. Title companies generally require a survey before they will insure a property without exceptions.
Prepare abstract of title
An abstract of title summarizes the history of the title to a specific piece of real estate. The purpose of the abstract is to present everything that the title company discovered during its research and surveys.
Usually, the abstract of title starts with the initial grant deed. The document includes any relevant information about title history and land data. Changes in ownership, easements, encroachments, encumbrances, liens, litigations, restrictions, tax sales and other legal actions are also recorded.
Act as closing agents
The final closing for a house is often held at a title company office. In this case, someone in the firm acts as the closing agent. It’s the closing agent’s responsibility to collect signatures on closing documents before payment can change hands.
The title company acts as an unbiased third party during the closing to make sure everyone is on the same page. A closing agent explains all the documents and makes sure the buyer and seller understand the terms of the sales agreement. During the closing, signatures are obtained and closing costs are due.
A closing agent also prepares all the legal documents, such as loans and title insurance policies. The title company then takes the signed documents to the court and completes the transaction.
Hold escrow payments
Title companies receive and distribute payments related to real estate transactions. The escrow officer, or agent, is a third-party professional who helps manage the closing documents and payments during the homebuying process.
Depending on where you live, your officer may be an individual who works for the title company or a licensed attorney. An escrow agent is a third party, meaning they don’t work for the buyer or the seller. Most of the time, it’s an attorney.
Do I need title insurance?
Title insurance is a type of indemnity insurance, meaning it guarantees compensation for losses after specific events. A policy covers risks such as outstanding claims to a property. It’s intended to protect the property rights of homeowners. Usually, if you have title insurance, the firm will help defend your title if an unexpected issue comes up. This could include negotiating with lenders if an outstanding lien is found.
Title insurance is important because there may be issues regarding your title even after all the public records research. For example, an estranged family member of your home’s previous owners could claim ownership of the property. Title insurance would cover the expenses related to settling such an issue.
- What it covers: Title insurance protects you in case somebody else makes a title claim on your house. It covers legal fees that could otherwise make you financially vulnerable.
- What it doesn't cover: Title insurance does not cover property damage or loss that results from theft, fire, flood or other disasters.
Most people consider title insurance when they buy a house. Some lenders require it. However, homebuyers are not required to purchase title insurance.
The cost for an owner’s policy is based on the home’s purchase price. It’s usually less than 1% of what you paid for the house, paid upfront as a one-time payment. On the plus side, there aren’t any ongoing or recurring fees.
How to choose a title company
Title companies do a lot of important work during the homebuying process, which makes finding the right company critical to the overall success of the transaction. Here are a few of the things you should look for when comparing title companies:
- Look locally: We recommend choosing a local company. It’s easier to do most of the paperwork in person, and the process will go a lot faster. A local title insurer usually has agents who know the area and have more specific expertise.
- Compare multiple firms: Start by asking your lender and real estate agent for recommendations for title companies. They should already have experience working with at least one company in your area. You can also ask neighbors, friends and family members who have recently purchased a home. Additionally, you can check with the American Land Title Association (ALTA) to see if there are certified title companies in your area.
- Consider your budget: Title insurance costs include endorsement fees, title search fees, deed preparation fees and other certificates. According to Realtor.com, the average cost of title insurance is around $1,000 per policy. Keep in mind that title companies charge different rates, so sometimes you may have to shop around if you want to find the best price. However, cheap doesn’t usually translate to good service, so you might want to prioritize other factors ahead of cost.
- Read reviews: Reading reviews gives you insight into the company’s track record. You can also read reviews to get a better understanding of the company’s customer service. Avoid companies with frequent reports regarding a rude or slow service department.
- Make a decision: Choose a company that answers all your questions and offers flexible hours. Having a smart partner on your side is a huge asset that helps you understand every facet of the legal documents and makes the homebuying process much smoother.
Title company FAQ
- What is the difference between a title and a deed?
- A title is the legal proof that you own a property. A deed is the legal document that transfers the ownership of a property from one entity to the next. A deed is a physical piece of paper that is signed by both parties, whereas the title is more of a concept.
- What happens when a title company makes a mistake?
- What happens when a title company makes a mistake depends on your contract. For example, if a lien was missed, the title company might pay the lien to get it removed, but you could then have a subrogation claim against you for that amount. According to BPE Law Group, you can’t make a claim against a title company for negligence if they miss a lien.
- What does a title company do for the seller?
- A title company makes sure the seller has the legal right to sell real estate to the buyer. Title companies also help organize forms and payments.
- What is a title commitment?
- Sometimes called a preliminary title report or a binder, a title commitment is the document a company makes as a promise to issue title insurance. When you buy a house, you get the title commitment just before closing day.
- What does a title company charge?
- Title companies charge for conducting title searches, maintaining escrow accounts and other services. The fees are typically included in closing costs.
- When do you meet with the title company?
- You typically meet the title company at closing, or sometimes before.
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