What Does A Title Company Do?

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 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 is an independent party involved in a real estate transaction. It is separate from the lender, the buyer and the seller. Title companies are sometimes called a title search or title insurance company, depending on the extent of their services.

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.

A title company’s role centers on reviewing the property’s history, confirming ownership rights and issuing insurance policies to protect against legal claims. Their role helps ensure the home can be sold without unresolved disputes or other issues.

What does a title company do?

A title company’s main role is to ensure that the property’s title is legally sound and that the closing process goes smoothly. These responsibilities help reduce legal and financial risk for everyone involved. Title company services fall into several categories.

Review the chain of title

The chain of title is the documented history of who has owned a property over time. Reviewing it helps confirm that the seller is the legal owner and that no one else has a claim to the home.

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 and whether that ownership is legally sound. If the title is incomplete or has unresolved problems, such as a missing signature or unpaid lien, it may need to be corrected before the sale can move forward.

“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.

Provide escrow services and financial management

Title companies 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.

The title company often manages escrow funds such as earnest money and loan proceeds and ensures funds are distributed according to the terms of the sale.

Offer title insurance

Title companies offer title insurance that protects the mortgage lender if title issues surface, and also potentially the buyer, depending on the policy. 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 Patti DeGennaro, a former chief implementation officer for Title Alliance, Ltd. “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.”

Title insurance policies are typically issued once the title company has completed its review of public records and confirmed that the title appears valid.

Oversee closing

At closing, the title company prepares settlement statements, coordinates signatures, ensures documents are properly notarized and records the deed with the appropriate county office. Acting as a neutral party helps keep the transaction on track and reduces the chance of last-minute issues that could delay the sale.

Learn more: When is it too late to back out of buying a house?

Potential title defects that can delay closing

Before a title company can confirm that a property is ready to transfer ownership, it must check for problems that could limit the buyer’s right to the home.

Here are some common title defects that a title company can root out and help you fix:

• Liens
• Restrictions, such as rights of way and easements
• Fraudulent transfers
• Unknown heirs
• Prior unpaid taxes
• Prior mortgages
• Wake-up court judgments

A title defect can delay closing or even make it impossible to complete the sale until the issue is resolved. The title company’s job is to identify these risks early and work with the appropriate parties to clear them before settlement.

How much do title company services cost?

According to the Consumer Financial Protection Bureau, title insurance premiums typically range from 0.5 percent to 1 percent of the home’s purchase price.

Title service costs may vary by state. The cost often depends on the extent of the services required, such as if probate or foreclosure searches are needed, says Saadeh.

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. What you pay largely depends on the coverage amount you select.

Who pays? The buyer or the seller?

Again, who pays for title insurance 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.

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.

Next steps

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.

FAQ

• When is title insurance required?
  

  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.

• Who picks the title company, the buyer or the seller?
  

  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.

• Do you have to use a title 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.