Title Company (What does a title company do?)
In this article, we'll educate you on a Title Company and answer the question - What Does a Title Company Do?
It's a rare residential real estate transaction that doesn't involve a title company. When it's time to engage a title company in the process of buying your own home, you may be more comfortable if you fully understand what a title company does and how they're paid for their services. Here's a primer to the role a title company plays for home buyers and sellers.
What Does a Title Company Do?
So exactly what does a title company do? Title companies work as an impartial facilitator for all the parties involved in a real estate deal, including the buyer, the seller, the mortgage lender, and the insurance company. Once an offer is accepted on a property, the title company acts almost like a project manager to gather all the necessary information and monies and ensure that the transaction is completed. Trying to manage the process yourself as a buyer or seller would be difficult, mainly since most homeowners and buyers have limited knowledge of the legal and financial requirements involved in real estate.
If the buyer's offer involves putting money down -- what's known as earnest money -- the seller will need the services of a title company to put those funds in escrow upon acceptance of the offer. The buyer and seller can negotiate to determine which title company will be used, or the seller can make a decision based on experience or a real estate agent's recommendation.
Once the initial offer is accepted, and title insurance is requested, it can take about two weeks to run a review and apply for a policy. Depending on how hot the real estate market is in your area, sometimes this will take longer. It can also take more time if the title examiner uncovers a problem with the title; this will have to be investigated and resolved in a process called curing.
Be sure to add in another week or two for the paperwork to be completed and accepted by the mortgage lender. After the funds are available for the deal, closing can be scheduled. The entire process usually takes about a month, but can be much faster if the buyer is not financing the purchase through a third-party mortgage lender.
In addition to managing the process, title companies take care of the paperwork -- which is considerable for even the most simple real estate transaction. They also handle:
Buyers want to be sure they'll own the property they are purchasing free and clear. While a title search may uncover issues with the property, the primary purpose of a title search and review is to ensure that there are no roadblocks to limit the insurance company from issuing a title insurance policy. In conducting the investigation, the title company is looking for problems like:
- Clerical errors in the title paperwork that could cause legal issues down the road.
- Illegal deeds, where another person connected to a past seller has a legal claim to the property.
- Liens for unpaid debts that weren't taken care of in previous transactions.
- Fraud, such as forged documents in the past that impact the current deal.
- Issues with easements or boundaries, where others may have a claim to use part of your property.
Reviewing the Property Title Search
Once the title company checks for these outstanding issues, the company may attempt to clear up any problems with the goal of being able to qualify the property for title insurance.
When done with their review, the title company will issue a preliminary title report, sometimes called a title commitment, that explains any concerns or gives the green light for insurance.
The report may include information about past liens that were paid, foreclosures or any other legal issues that have involved the property for sale, but the title company is not obligated to report any of these issues to the property buyer or seller -- especially if those issues have been resolved.
Acting as an Escrow Officer
If the buyer puts any money down as part of making an offer, those monies will be held in escrow by a trusted third party until the deal closes. The title company can act as an independent escrow officer for funds and for keeping the funds from the mortgage lender until all the paperwork is signed and the written instructions from the buyer and seller are completed. As well, the title company can hold the seller's deed and manage the deed transfer once the money is received by the seller.
Issuing Title Insurance
Once the title review is complete, the title company will facilitate the process of issuing a title insurance owner's policy to the property buyer. Working with an insurance company that takes on the risk, the title company arranges for a policy that will pay out if a future problem is discovered in which the seller could be held legally liable. The title insurance protects against a financial loss if any property claims or legal issues come up after the initial title search and review.
Serving as the Closing Agent
As an agent to each party involved in the real estate transaction, the title company makes sure the paperwork is complete, all the loose ends are tied up, and the "project" is completed to the satisfaction of all involved. Part of their work includes:
- getting signatures on all required documents
- receiving payments from the buyer and the buyer's lender
- distributing payments to the seller and dispersing funds to any third parties who are owed, such as lien holders
- filing legal documents with the county and any relevant government agencies
In most states, buyers and sellers do not both need to be present at a real estate closing. Instead, the title company ensures that each party has fulfilled its obligations before completing the transaction.
The Roles of the Escrow Officer, Title Examiner, & Title Attorney
You'll come into contact with several different people at a typical title company (typically the Escrow Officer, Title Examiner, and the Title Attorney). Some employees have more than one role in a smaller firm. However, most title companies employ:
- Escrow Officer/Title Insurance Agent (these positions are often one and the same) - Most buyers and sellers will initially communicate with a title officer, who manages all of the company's responsibilities throughout the real estate transaction. That title officer is the person you'll talk to if you have questions about the process and who will explain any title issues that arise. These officers are responsible for ensuring that closing goes smoothly and that all the necessary paperwork is signed so that monies can be dispersed.
- Title examiners - These are the trained professionals who gather the legal documents on the property and review them for any inconsistencies or proof of another party having a claim. The examiner will issue the report with any concerns that he or she has uncovered during the review process.
- Title Attorney - The Title Attorney is in charge of the entire office, and ultimately responsible for all the title policies issued through their office. A title company attorney cannot give any legal advice to any party involved within the transaction. The attorney must remain impartial and unbiased. Therefore, if a buyer or seller has legal questions, they must obtain their own, separate legal representation.
- Administrative employees - Title offices rely on office personnel to serve as receptionists, marketing staff, accountants and human resource specialists, much like any office. You usually won't come into contact with these professionals during your real estate transaction, but their assistance helps the process run smoothly.
Title Insurance Policy
When obtaining a title insurance policy, you should be aware that there are two types: Owner insurance and lender insurance. Owner insurance covers the new purchaser and protects against mistakes, fraud or other claims to the property. Lenders title insurance provides the same protections for the lender as the owner's policy does for the owner.
Lenders Title Insurance
The buyer's lending company will also often require title insurance to protect their investment. For buyers, it is less expensive to piggyback on the work done for the seller and purchase a policy through the same title company. In some cases, the seller will pay for both policies just because it is cheaper and easier to do so.
Owner's Title Insurance
Buyers may also need title insurance to satisfy lender requirements. Once the work is done for the owner insurance policy, it is less expensive and more convenient for the buyers to either purchase for themselves or to have the sellers incorporate the price of a second policy into the closing costs they will pay. It is possible, however, for the buyer to select a different title company to provide a review and issue a title insurance policy. In this case, it's normal for the seller's title company to act as the escrow and closing agent.
If the buyer and seller do choose to use two different title companies for the entire process, it is called a split closing. Most state laws are very restrictive on when and how this can be done, as it's primarily utilized in commercial real estate transactions. Due to the practice being cost prohibitive for most residential deals, it's done infrequently.
The title review process is done to determine whether a title insurance policy should be issued. It's in the best interests of the title company to do a thorough search and uncover any issues with the property, but they are not legally responsible if they do not find an existing problem. The title insurer, which issues the insurance policy, will take responsibility for correcting any mistakes or paying for financial losses incurred if there's a claim, lien or other problem with the property title.
The title company is not responsible for fixing any title defects -- just in determining if a title insurance policy is a good bet. You may not be informed of a title defect until you receive the title commitment or told you may not purchase title insurance. If your title company discovers a problem and lists it in the title commitment or report, it may be advisable to hire a knowledgeable real estate attorney for legal help.
Who Pays for Title Insurance
Like almost all other items in a real estate deal, who pays for the title insurance is negotiable. In most simple residential real estate transactions, the seller will pay for owner insurance, and so he or she will choose the title company.
During a frantic seller's market where homes receive multiple offers in a matter of hours, it is not unusual for a buyer to offer to pay the title insurance policy as part of their offer. To learn more, see our article about bidding wars (and how to win a bidding war for a house).
How Much Does Title Insurance Cost?
Title companies in the State of Texas are regulated by the Texas Department of Insurance, which sets the costs that the company can charge for its services. That means you will pay roughly the same amount at any title company, so there's little need to shop around based on price.
The title company charges for its services as part of the closing costs. While you'll have many expenses included in your closing costs, such as appraisals, lender fees, and taxes, the money that goes to the title company is usually listed as:
- Title Report. This covers the title examiner's time to research the title and any costs for procuring documents from the county.
- Closing or Escrow. These fees cover the cost of the escrow agent's time and incidental expenses like copies.
As well, the title company usually gets paid a small premium from the insurance company who issues the title insurance policy, as thanks for bringing them a customer.
Do I Need Title Insurance?
If the buyer is financing the deal without using an outside lender and does not require the seller to purchase title insurance, it may be possible to forego the title review and insurance process. However, this is considered to be risky, as the relatively inexpensive cost of title insurance more than offsets any financial losses you may incur from a lawsuit or clearing up a title issue. Some examples of problems that would only come up with a thorough title search -- or may not come up at all -- include:
- Delinquent taxes that are not recorded for at least a year after the tax bill is due.
- Nursing home costs that are not assessed as a lien until the death of the patient.
- Claims by an ex-spouse for a portion of the property proceeds.
Title insurance will cover these and many other unusual situations that could arise connected to your property deed.
Also, without a title company, you'll have to locate independent escrow and closing services. For the majority of residential real estate deals, it makes sense to use the services of a title company.