What Does A Title Company Do? A Guide For Home Buyers

While you may find a beautiful home at just the right price, another lurking issue could endanger the sale: title. Past owners and liens can obstruct your path to homeownership because other parties have the legal right to the property. So, whether you're eagerly perusing listings or contemplating your first foray into buying a house, hiring a title company is indispensable.

The title research industry protects against ownership disputes and troubled ownership histories that can ruin deals. Here’s what to know about hiring a title company and making it to the closing table without encumbrances.

What Is A Title Company? 

A title company is a third party that provides information to the home buyer and lender about the title of the house to be purchased. The title company researches the ownership and history of the house to ensure that no past owners and lienholders (such as a lender with an old mortgage) can lay claim to the property. This way, the transfer of the title and the complete ownership of the property can go to the buyer without a hitch.

The concept of title is essential to homeownership because it provides the right to use, modify and sell the property. When you buy a home and receive the title, a legal document known as the deed documents the transfer of title. In other words, the deed is the physical, legal proof that you possess the title. If the title company uncovers issues with taking ownership of the property, the buyer can negotiate with the seller to resolve them.

Common Defects A Title Company Can Find

A title company conducts a title search to reveal title defects before the home purchase. This process uncovers problems that can deter the home sale, including:

• Liens
• Outstanding mortgages
• Undisclosed owners or heirs
• Other lingering debts, such as solar panel loans, HOA fees and property taxes
• Easements (agreements that another party can use a portion of the property)
• Encroachments (when another person has a structure overhanging or sitting on your property)
• Restrictions

What Is Title Insurance? 

Although title companies specialize in detecting title issues, they aren’t perfect. Problems can fall through the cracks, and surprise ownership disputes can emerge in the future despite all parties performing their due diligence.

Fortunately, title insurance covers the costs of impingements on the title for your home after you move in. There are two types of title insurance: one for lenders, and one for owners. While each type covers a different party, the home buyer is responsible for paying for both. Here’s a breakdown of the two:

• Lender’s policy: When a lender gives you a mortgage, they’ll require you to purchase title insurance. The coverage pays out your mortgage if a title issue obstructs the home purchase. As a result, buying this policy is an essential step in the mortgage process, and you’ll need it when you head into closing day. While it’s possible to negotiate with the seller to foot the bill, paying for this insurance is ultimately the buyer’s responsibility.
• Owner’s policy: Title insurance for owners pays you for the equity you’ve built since purchasing the home if an issue arises, including encumbrances and old mortgages. For instance, if you’ve been in the home for 5 years when a past owner with a valid claim to the property comes out of the woodwork, your policy will give a payout equal to the equity you have in the home. The money can help you pay off a past owner, resolve a lingering lien or minimize the financial damage of a legal dispute. Like the lender’s policy, you might be able to persuade the seller to include this policy as a concession. However, this policy isn’t mandatory for a home purchase, and it’s up to the buyer to secure this coverage.

What Does A Title Company Do? 

During the home buying process, a title company performs a title search on the property to check for old owners, active liens and other encumbrances that could interfere with the sale. Here are the specific services provided to the home buyer.

After the title company finishes researching the property, it will deliver an abstract of title and an opinion based on the information gathered. These documents will describe any defects found with the property and advise the buyer on whether to continue with the deal or back out. The documents will also declare whether the title company is willing to provide title insurance based on the stability of the property’s history.

Establishes The Chain Of Title

The title company tracks the chain of title. In other words, the company traces the history of ownership for the property to ensure there are no breakdowns in the timeline or questions about who received the title throughout the years.

Performs A Property Survey

The title company might also perform a property survey to detect any easements or encroachments. These issues can affect your use of the property and are crucial to address when you first buy the home. Otherwise, you might forfeit a portion of your property or pay a penalty for inappropriate use of the land.

That being said, some encumbrances are typical (such as the mortgage you take out to buy the home) or unavoidable (such as public use of part of your property to access a road). In any case, the details of a property survey will help you understand how your property can be used and how the boundaries of your property line up with the current usage of the land.

Holds Money In Escrow

A title company also acts as the third party holding money in escrow on the buyer’s behalf. The escrow account holds the buyer’s earnest money deposit, which holds a lump sum the buyer puts forward to show they’re serious about purchasing the home. The money eventually pays for some or all of the closing costs and down payment if the sale goes through. If the buyer backs out of the deal because of a valid contingency, they get their earnest money back. However, backing out of the deal for a reason not stated in the contract can result in losing your earnest money.

Provides Closing Services

Title companies can also facilitate the closing process by providing a space for closing to take place, preparing documentation for the transaction, hiring an attorney to review the terms of the deal and filing the deed after closing. An agent from the title company will be present at closing to represent the title company and confirm that the company found no defects to prevent the transaction.

Issues Title Insurance

Title companies also provide title insurance. Your company can provide both lender and owner policies, as described above. Remember, the lender’s policy is mandatory, so it’s crucial to have proof of this policy at closing.

How Much Do Title Company Services Cost? 

Title company services comprise a large part of the buyer’s overall closing costs, which are usually between 2% and 6% of the purchase price. In other words, the loan amount helps determine your closing costs, a significant portion of which are title company service fees.

For instance, if you buy a house for $300,000, the closing costs can run between $6,000 and $18,000. Writing a check for this amount will cover the title company’s services and other services to complete the closing process.

Title company service costs vary by lender and location, so it’s crucial to shop around to see who can give you the best deal. Additionally, the purchase agreement between the buyer and seller will specify the closing costs and the party responsible for paying them. For example, the seller might pay for the title insurance (which usually costs between 0.5% and 1% of the purchase price) as a concession to the buyer.

How To Choose A Title Company 

Choosing a title company is like choosing a lender: Each company has its own fee structure and requirements, and doing your homework is vital to understanding which option makes sense for you. There are also multiple ways to shop for a title company, such as:

• Ask for recommendations: Asking your family and friends for title company recommendations can help you find a reputable title company. Just like you would ask your inner circle for pointers on a real estate agent, you can tap your network for title companies with a proven track record.
• Research options online: You can search for title companies online and also research any recommendations from others. Check online reviews and peruse each company’s website to compare each company’s services.
• Shop around: When your research has led you to several options you like, contact each company for more details. Ask about their services, methodology, fees and consumer protection policies. It’s also recommended to confirm that the company isn’t owned by a lender or a real estate company. Otherwise, the business has a conflict of interest and can’t act as a neutral third party.

FAQs On Using A Title Company

The answers to these frequently asked questions are a quick guide to the basics of title company services.

Do I have to use a title company? 

When you take out a mortgage or refinance your loan, your lender will require you to pay a title company to perform a title search and provide title insurance. These are protective measures to ensure that the buyer will have exclusive ownership of the property. Although buying a home with cash frees you of lender requirements, hiring a title company is still an excellent idea because it can uncover title defects that hinder your ability to buy and own the house.

Who chooses the title company? 

The home buyer chooses the title company to perform the title check and provide the title abstract. Although lenders, real estate agents, and sellers can recommend title companies, the decision rests ultimately with the buyer. For this reason, it’s crucial to research options when choosing a title company to find the best deal.

What documents does a title company need?

You’ll provide documents for the title company to provide its title search and closing facilitation services. Specifically, you’ll submit your proof of identification, homeowners insurance policy and documents for your personal circumstances (such as a divorce decree or documentation for a trust to hold the property).

The Bottom Line: A Title Company Can Protect You From Unforeseen Risks

Through meticulous research and analysis, a title company identifies potential issues with the property's title, such as liens, mortgages, undisclosed owners or encumbrances. This scrutiny allows buyers to make informed decisions and negotiate with sellers to resolve discrepancies before finalizing the transaction.

Moreover, title companies offer essential services beyond title searches, including holding earnest money in escrow, facilitating the closing process and issuing title insurance policies to protect lenders and owners against future disputes. While the cost of title company services contributes to the overall closing expenses, their expertise and thoroughness are invaluable in safeguarding buyers' investments. You can start the journey toward the home of your dreams by starting the application process with Rocket Mortgage^® today.