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You’ve fallen in love with a property, signed a sales contract and arranged your financing. There’s one more step to complete before finalizing the purchase of your new home – making sure the title is clear.
A clear title means no one’s standing in line waiting to claim a piece, if not all, of your new property. That’s where a title company comes in.
A title company does the important work of confirming that a seller can legally transfer the property to you. The company may provide you with title insurance to protect you if there’s a problem with the claim.
From there, you’re a step closer to homeownership.
What Is a Title?
The title is the legal right to a property, including the right to own, control, use and sell it. When you become a homeowner, you assume the title and the bundle of rights that come with it.
A house title company performs a title search, vetting the title of a property by tracing previous ownership and related legal transactions.
Once the title search is completed and the title is transferred to you, you get all those rights. But your title won’t be claim-free. When you take out a mortgage loan, the lender uses the property as collateral for the loan and registers a claim on the title of your home.
The claim gives the lender the right to repossess and sell your home in case you stop making your monthly mortgage payments (aka default on the loan). Once you’ve paid off your mortgage, your lender will release the claim on the home.
What Is Title Insurance?
While title companies are responsible for looking into claims or liens against a home that occurred during previous ownership, once in a while, things may fall through the cracks.
That’s where title insurance comes in – it protects lenders and buyers from financial losses due to problems that weren’t apparent during the title search or in case claims on the property crop up in the future.
There are two kinds of title insurance:
- Owner’s title insurance protects the buyer
- Lender’s title insurance protects the mortgage lender or bank
Lender’s title insurance
Lenders almost always require that borrowers buy lender’s title insurance before they issue the mortgage. Lender’s title insurance protects lenders from financial losses in case there are defects with the title. If there are defects, the lender can be repaid, and they can sell the property.
Because lender’s title insurance only protects the lender, you have to buy owner’s title insurance to protect yourself. FYI, each type of title insurance can cost $1,000 or more.
Owner’s title insurance
While it’s rare for problems to come up after a title search has been completed, it happens often enough for there to be measures in place to protect you as a buyer. Title insurance helps ensure your investment in your home is protected.
Owner’s title insurance is issued when the insurer feels confident the title is clear. The title insurance policy covers problems related to issue(s) that took place before you became the owner of the property and come to light after the property is transferred to you.
In most cases, title insurance remains in effect as long as you own the property. Here are examples of situations where title insurance can protect you:
- Mistakes in the title search that mean the seller didn’t have legal title to the property
- Conflicting wills leading to ownership disputes
- Errors on a property survey that impact the value of the property or how it’s used
- Debts (think: unpaid taxes, utility bills, condo fees, special assessments and contractor fees)
- Easements and encroachment that impact use
- Incorrect signatures, forgery and fraud
- Compliance issues with local bylaws that require parts of the home to be demolished or rebuilt
- Encroachments on neighboring properties
Also, having owner’s title insurance will make it easier to refinance and sell your home later if needed.
What Is a Title Company and What Does a Title Company Do?
A title company assists a home buyer in the purchase of a property by researching the title, identifying issues and suggesting ways to remedy defects.
Once the title is clear, the title company issues title insurance, acts as the escrow agent and helps close the sale.
What are the responsibilities of a title company?
Once you sign a sales contract showing your intent to buy the property, a house title company gets to work. It can perform a wide array of tasks to close the deal and get you into your new home.
- Chain of title: A title company researches the chain of title of a property, which is the chronological history of the property’s ownership. Each link in the chain represents an owner, and the chain must be complete to ensure the title is clear.
- Property survey: A property survey checks that the legal description of the property you’re buying matches its actual physical boundaries. Title companies order the surveys and advise on any issues, like encroachments from neighboring properties, shared yards, rights of way and easements.
- Abstract of title: A summary of the ownership history of the home, including transfers, claims, outstanding mortgages and liens. The abstract also confirms that property taxes and utilities are paid and up to date.
- Title opinion: Once research into the title is completed, the real estate title company can arrange for an attorney to issue a legal opinion of the title. This is a written report that describes any problems with the title and how they can be fixed.
- Title insurance: Once the title search has been satisfactorily completed, the title company prepares owner’s and lender’s title insurance policies to protect against claims.
- Escrow management: A house title company can conduct escrow, acting as a neutral third party between the buyer and seller. As the escrow agent, the title company receives security deposits (aka earnest money deposits) and mortgage funds, holding money in good faith until all purchasing conditions are met.
- Closing: You’re getting there! When the sale is ready to close, the title company can provide the services of an agent or attorney to receive mortgage documents from your lender and make sure that all requirements and signatures are complete.
- Funding: Now, it’s time for the funds in escrow to be disbursed. The lender transfers the total mortgage amount to the title company that’s acting as the escrow agent. Once the funds are released to the seller and the seller’s mortgage is paid, the title is clear and ready to be transferred to you.
- Filing paperwork: All necessary documents, like the deed, are filed according to local laws, and now you’ve got the title to your new home.
When do you pay for title services?
Title services are paid from funds held in escrow. The escrow agent prepares a Closing Disclosure that details all payments related to the purchase, including real estate agent fees, title insurance, transfer taxes, appraisers, surveyors and title fees.
Once the lender transfers the loan to the escrow agent, the fees are paid out.
What does a title company charge?
On average, you can expect to pay 2% – 5% of the home’s purchase price to the real estate title company. Title companies usually charge a base fee plus a percentage of the cost of your home above a certain threshold.
While title insurance makes up most of the fee to the title company, the final cost will depend on all provided services. For instance, a complicated chain of title that involves a lawsuit or foreclosure may take more time to research than a straightforward title.
Fees also depend on insurance regulations in your state, the purchase price of the home and the terms you negotiated with the seller. Some of the fees you can expect to pay to a title company include:
- Title search fee (chain of title, abstract of title, opinion of title)
- Title insurance premium (one-time payment)
- Escrow fees (if applicable)
- Title company closing costs
- Additional service fees
How Do You Pick a Title Company?
Before placing your dreams of homeownership in the hands of a title company, make sure the company is reliable and reputable. Your agent or broker may recommend a company they work with, which can be a sign that it’s a trusted business. But you can pick any title company you’re comfortable with.
Here are some tips for choosing a real estate title company:
- Ask for recommendations from family, friends and neighbors
- Find out whether the title company can handle various services (closing, escrow, preparing documents, etc.) and compare its fees with other title company fees
- Consider the company’s track record and whether it’s financially stable
- Look for a company familiar with state and local laws
- Read testimonials and online reviews from previous customers
- Check the title insurance company’s ratings
- Get a sense of the company’s quality of service. Were previous clients satisfied? Does the company respond quickly and thoroughly answer your questions?
Title Yourself ‘Well-Informed Homeowner’
Wanting to own a home and owning a home are two different things. A title makes owning a home a reality. Real estate title companies perform critical services to ensure that the house you’re buying is yours and yours alone.
By finding a reputable title company to work with and understanding the purpose of each phase of the process, you can make your journey to homeownership much less stressful.