While you're buying a home or investment property, you may be told to search for a title company. In that case, you may be wondering, "What does a title company do?"
Keep reading to learn about the roles and responsibilities of a title company in a real estate transaction, as well as advice on how to find a good title company and how you can prepare for the cost of title services.
What does a title company do in a real estate transaction?
Perform a title search
The first thing that title companies do in a real estate transaction is perform a title search. A title search is meant to find any obstacles that might get in the way of a clean transfer of ownership.
In particular, title companies look for the following:
- Existing mortgages: The title company looks to see if there are any mortgages that need to be paid off before the property can be sold.
- Liens on the property: If there are any liens on a property, such as a home equity line of credit or unpaid association dues, those will need to be paid off as well.
- Judgments: A judgement lien is the result of a court order from a lawsuit. For example, if the previous owner has unpaid taxes, they might need to be paid in order for the judgment to be resolved before the home can be sold.
- Restrictions: The title company will also look for any restrictions that would prohibit you from living in the property. For example, if you decided to live in a 55-plus community, the title company might need to make sure that you are of age.
- Easements: Easements occur when usage rates are given to someone who is not the property owner. They are common when there is a feature like a shared driveway on the property.
- Leases: The last thing that a title search will look for is any existing leases.
Order a property survey
Next, the title agent will order a property survey. A property survey will ensure that the property only takes up the space indicated on the title. It will also specify if there are any easements or encroachments that need to be sorted out before title can be transferred.
Prepare title abstract
Once all of that research is done, the title company will issue a legal document known as a "title abstract." Your lender and your real estate agent will both be given a copy.
Essentially, this document outlines the property's ownership history, as well as any of the issues noted above that may need to be taken care of before ownership of the property can be transferred.
Issue title insurance
After any issues pertaining to the property's title have been cleared, the title company will issue a title insurance policy. There are two different types of title insurance policies that need to be considered: lender's title insurance and owner's title insurance.
A lender's title insurance policy is usually required in order to get a mortgage. This policy protects the lender's investment in case there's ever an issue and you lose the home.
An owner's title insurance policy, on the other hand, is usually optional. However, it's generally considered to be a smart investment. This title insurance policy protects the equity that you've built up in the home if there is ever a challenge to your ownership.
During the course of the transaction, your title agent may also act as an escrow officer. An escrow officer is a neutral third party who is in charge of facilitating the exchange of funds. For example, the escrow officer will hold the buyer's earnest money deposit until settlement, when it can be applied to their down payment.
Similarly, if there are any repair credits negotiated during the inspection process, the escrow officer will also be responsible for managing that exchange.
Facilitate the settlement
Finally, your title agent will also be responsible for facilitating the last step in the closing process, which is settlement. They will make sure that all the correct paperwork has been signed.
How to choose a title company
When it's time to choose a title company, the best place to start is to ask the professionals. Your mortgage lender or real estate agent will likely be able to point you in the right direction.
In some states, like Pennsylvania, for example, the cost of title services is regulated across the board. If that's the case in your state, it doesn't make much sense to shop around. However, in other areas, shopping around for your title insurance can help you save money on your closing costs.
If you do have the ability to shop around, it's important to understand what you're getting for your money. Be sure to ask whether you are getting an owner's title policy in addition to the lender's title policy and, if so, what your owner's policy covers.
How much do title services cost?
Since the cost and process for title insurance varies by state, it is hard to estimate how much you'll end up paying for your title services. However, one estimate found that the cost ended up being around $1,000 for buyers.
Still, if you'd like a closer estimate, you can use a title insurance calculator like this one to do your own research.
The bottom line
At the end of the day, title companies do a lot of behind-the-scenes work in the closing process. While the cost of title services may seem like an additional burden while you're adding up your closing costs, it is definitely a necessary one.
Truthfully, your real estate agent and your mortgage lender will probably be your primary points of contact for the title company. However, if the title company does ask you to provide them with more information, your best bet is to try and assist them with whatever they need from you as quickly as possible. Doing so can help ensure that the road to settlement goes smoothly.