What Does a Title Company Do?
A title company is a crucial player in the real estate transaction process. When buying or selling a property, a title company helps ensure that the ownership of the property is free and without any liens or encumbrances. But what does a title company actually do?
This article will delve into what a title company does and explain how it can help you. We will discuss how title companies protect the interests of both buyers and sellers, as well as lenders and other stakeholders involved in the transaction. Understanding the importance of a title company is essential for anyone involved in a real estate transaction, whether you are a first-time homebuyer or a seasoned real estate investor.
A house title is the property’s record of ownership. The house title contains information about previous owners, a physical description of the property, and any liens against it. Your mortgage will appear as a lien on the house title if you just bought the home. It is different from a deed which is a document you get at closing that states you own the property.
A title company is a third party acting on behalf of both the lender and the buyer. You hire them to research and verify the title of the home you’re buying.
Why is that important? For instance, let's say you buy a home without hiring a title company. Later, you learn that the seller only owns half of the house because he inherited it when his father died. The other half of the inherited home belongs to his brother, who shows up on your doorstep demanding his 50% share. Think about how unpleasant that would be for everyone. The title company and the title insurance policy you purchase from them protect you from any liability and are crucial to a successful closing.
Here is what you can expect from a title company now that you know what they are and why they are necessary.
Chain of Title
Title companies research the "chain of title" or the complete history of a home's ownership. A search from a title company would have revealed the second owner and prevented the sale before closing. They also look for existing liens, so you will not have to find out the hard way that a contractor never received payment for past work and now expects it from you. They will also make sure all property taxes have been paid in full.
Title Research and Property Survey
Your title company will perform a property survey. Most states require surveys in order to close on a home. Surveys ensure that the property occupies only the space indicated on the title. It also works the other way like if you want to know if your neighbor’s fence is actually on your property.
After the research is complete, the company provides a report called a “ title abstract .” You and your lender will get a copy to review before the closing of the property. The abstract differs from your title insurance policy. That’s a separate document you’ll receive from your agent.
There are two types of title insurance policies offered by title companies: one for the buyer and another for the lender. Since your lender has a financial interest in the property, title insurance financially and legally protects them the same as it does you in case someone comes forth with a claim for the property that the title search missed.
In general, the seller of the home you are buying covers your title insurance policy, while you are responsible for your lender's policy. In contrast to most insurance policies, title insurance only requires you to pay a premium once when you close on the property. Afterward, you're covered for as long as you own the home.
Determining Who Holds the Title
It is crucial to work with your title company to ensure that the wording on your title accurately describes who has the right to transfer ownership. Your title phrasing may also affect the property taxes and fees you will have to pay if you decide to sell your home later.
When you are the only holder of the title and are not married, it would be easy to hold the title in sole ownership. However, the situation gets more complicated if you are married or live in a community property state. The title company can help you determine what’s best for you and what the title should say.
In most cases, title companies handle the closing of your home. This service could be called “settlement.” Depending on what your state requires, they appoint a signing agent or real estate attorney to examine all closing documents and finalize the deed and title transfer.
A title company can hold and manage money in escrow with the help of an escrow agent. The escrow account is a savings account managed by a third party - in this case, the title company – that distributes payouts under certain conditions.
Escrow accounts are widely used in real estate transactions because mortgage lenders want to ensure you have enough money for certain expenses. For instance, if your lender requires a certain number of months’ worth of expenses held in escrow, a title company may manage this account on behalf of both you and your lender.
During the process of buying a house, all parties involved must send or receive funds. Keep in close contact with the agent from your title company. Whenever you need to transfer funds, they can assist you in choosing the best and most convenient payment method.
Frequently Asked Questions About Title Companies and How They Help Buyers and Sellers
Title companies aim to help buyers close on properties without any issues. There's nothing wrong with having a few questions as you're nearing closing or looking for a title company. Here are some of the most frequently asked questions people have about title companies.
How do I choose a title company?
You should shop around for a good deal if you live in a state without fixed title insurance rates. You can ask your friends, family, or real estate agent for referrals. Finding a title company with excellent customer service and reviews is crucial when your homeownership rights are at stake. It is also a good idea to find discounts in bundling lender’s and owner’s policies whenever possible. Lastly, negotiate title insurance costs with the seller at closing, but be careful if the market is competitive.
Is it necessary to work with a title company?
While working with a title company is required by lenders before issuing a loan, it is not legally required. However, it’s always a good idea – even if you’re paying cash for a property – since the title company will research the home in detail to ensure the sale can proceed.
How does a title company help at closing?
The title company can also assist you in navigating any necessary changes before closing, such as adjusting the loan amount or adding a cosigner. A title officer must reissue documents to reflect any changes. In addition, if you choose to place your property under the name of a trust, LLC , or partnership, a title officer must review legal documents to ensure they align with title insurance guidelines. Finally, a title officer will verify your identity at closing by checking your driver's license or passport.
What does the title company do for sellers?
Even though title companies mainly benefit buyers, they also help sellers by handling all the paperwork, coordinating the closing process with the buyers, and negotiating settlements or lien payouts so the closing can proceed smoothly.
Can title companies remove liens?
Title companies cannot remove liens. Nevertheless, they can help sellers negotiate and settle with lienholders uncovered during the title research process. Ultimately, it’s up to the seller to determine the best course of action and cover any settlements or payments.
How much is title insurance?
Title insurance typically costs $1,000, but that cost varies by state, type of policy, and the coverage amount. The following is a breakdown of the costs based on the type of policy:
- Lender’s title insurance and owner’s title insurance combined: 0.5% to 1% of the purchase price for a lender’s and owner’s policy together
- Lender’s title insurance only for a refinance loan: Around 0.5% of the loan balance
Some states, such as Texas and Florida, have title insurance premiums set by the government. Texas would cost $832 for a $100,000 policy, which is less than 1%. The Iowa government underwrites title insurance policies, resulting in premiums as low as $110 for a $500,000 policy.
Your title shows who has owned the property in the past contains a description of the property and shows if there are any liens against it. Your title company is a neutral third party hired by you to research and insure the title of the property you are buying. Plus, they will manage the closing of your home.
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