When you buy a home, one of the players you’ll deal with in the process is the title company. The role of a title company is to verify that the title to the real estate is legitimately given to the home buyer. Essentially, they make sure that a seller has the rights to sell the property to a buyer.
Once a title insurance company has done its verification, it will back that guarantee with title insurance, which protects the lender and/or owner in the event that someone comes along and makes a claim to the property in the future.
The title insurance company also may be responsible for conducting the closing. It will maintain escrow accounts where your closing costs are kept until the day you close your loan. In some cases, the company that handles closing and the company dealing with title and title insurance will be different.
This blog post will go over what a title company does and take you through the process. Before we get there though, let’s take a moment to define a couple of key terms.
Understanding The Difference Between A Title And A Deed
One of the more befuddling things about the signing process on closing day is understanding the difference between a title and a deed. Not to worry, this is a common source of confusion. You know you need both, but you may not understand what they actually are.
A deed is a legally binding document used to transfer property from one owner to another. When you close on your home, this is signed and witnessed before being given to you as the new homeowner. It contains a description of the property so that everyone knows exactly what’s being transferred.
A title is the actual piece of documentation that says you, John Q. Homeowner, own the property. If you’re on the title, you’ll also sign certain documents related to the mortgage, regardless of whether you’re on the actual loan, so this ownership document is important. In community property states, you may have to sign this documentation whether or not you’re on the title because you have certain legal ownership rights to the property as a spouse. In some states, you may be able to sign documentation waiving spousal rights if you want to keep property separate during your marriage.
What A Title Company Does Before Issuing Title Insurance
Now that we know what a title and deed are, let’s go over the approach a title company takes in order to make sure your title is clean and free of potential ownership claims. Undertaking this due diligence also protects the title company from liability down the line when they insure your title.
Perform A Title Search
The first thing a title company will do is perform a title search, which entails looking for potential obstacles to the clean transfer of ownership. The thing that most often immediately comes to mind is whether other people have ownership in or rights to the property, but a title search also looks for the following issues:
- Outstanding Mortgages: Unless the previous home is owned free and clear, the current homeowner will have a mortgage tied to the property. This will need to be paid off at closing so that the title can be transferred to you.
- Other Existing Liens: You could have a lien on the property for other things like a home equity line of credit or a loan to pay off solar panels, for example. These will need to be paid off or otherwise removed before you can close.
- Unpaid Homeowners Association Dues: While this will vary depending on what’s written in the HOA contract, associations often give themselves broad powers in these agreements to place a lien on and even foreclose your property as a consequence of unpaid HOA dues. The dues of the previous owner will need to be dealt with one way or the other before moving forward.
- Judgments Or Unpaid Tax Liens: If the previous owner has some unfulfilled responsibility, they can be taken to court and the complaining party can win a judgment that stays with the property until the person is paid. One scenario where this could come up in homeownership is if a contractor wasn’t paid for work that was completed. If the IRS or another taxing authority places a lien on the property for unpaid taxes, they can collect proceeds in the event of a sale. Both issues must be taken care of.
- Restrictions: If there’s anything restricting the free transfer of ownership in a property, that can cause a problem. Examples of restrictions would be a requirement to be a certain age to live in a community or a requirement to belong to a certain group.
- Easements: Easements are agreements that, although you own the property, you’re giving someone else the right to use your land for a specific purpose. An example of an easement might be the right to use space for parking.
- Leases: Is the property rented out to anyone for a specified term? A title search will turn this up.
Conduct A Property Survey
If required, the title company will order a survey or drawing of the property. The aim of this is to discover any potential encroachments – such as if a neighbor’s addition was built on your property – and verify that the home is within its set boundaries.
This encroachment becomes a potential problem if damage is caused as a result. If there’s an encroachment or easements that could potentially cause a problem, your title company is required to take this into account and insure for.
There are exceptions to encroachment policies, but everything needs to be looked into and you may need to get an endorsement of the exception or insure for, which can cause a slight delay.
Prepare Abstract Of Title And Title Opinion
An abstract of title is a legal document that outlines the ownership history of a particular property. It not only covers when the property is sold, but records related to inheritance, court litigation and tax sales as well. Looking at the abstract gives you a great way to determine the history of the property.
An opinion of title is then written by the title company. This is the document that actually states that they think the seller has a valid title to the property and they would feel comfortable insuring the title if you’re doing a purchase or refinance. If there are issues that come up when researching the history of the property, those may need to be taken care of before you can get title insurance, which could delay the process slightly while things are being researched and T’s are crossed.
What Is Title Insurance?
When it comes time to actually insure the title, it’s important to note that there are two different types of title insurance: A lender’s title policy and an owner’s title policy.
If you’re getting a mortgage, a lender’s title policy is required. It’s typically paid for by the buyer, but there are certain areas where the seller pays for it in accordance with local custom. An owner’s title policy is optional. This protects your investment in the property, but you can also go without it at your own risk. Let’s explore these a little more in-depth.
Lender’s Title Insurance
Lender’s title insurance is meant to protect the mortgage lender if there’s an issue down the line with the title that causes you to lose the house in a property dispute. Mortgage companies require this because if something does go wrong, the insurance policy covers the loan amount.
It’s very important to realize that while it’s required, lender’s title insurance does nothing to protect any existing equity you have in your home. If someone successfully challenges that they had a legitimate claim to the title, the mortgage company gets its investment back, but you’re still without a home. To give yourself some protection, you need to invest in an owner’s title policy.
Owner’s Title Policy
In contrast to a lender’s title policy, an owner’s title policy does provide you with protection for the equity you built up over the months or years in your home.
Let’s say someone makes a claim to your property and they succeed in showing that the seller who transferred the property to you didn’t have the authority to do so. You would still have to move out, but the owner’s title policy would give you the money to buy a new house equal to the value of your home.
It’s still not ideal, and that’s why title company has worked so hard to do a complete a title search and property survey where necessary before signing off. They don’t want to have to make the payout and you don’t want to be uprooted.
What Does Title Insurance Cost?
Title insurance is paid in the form of a one-time upfront fee. For lender’s insurance, the average cost nationwide is $544. If you were to get an owner’s title policy, you’re looking at an average of $830 for a total of $1,374.
There are a variety of things that impact your title insurance costs. Among the biggest factor is the loan amount and the price of the home itself. Larger loans mean a larger insurance payoff in the event that something goes wrong. To compensate for this higher risk, title companies will charge more. Your title insurance cost will also be impacted by your geographic area and credit score, among other factors.
Finally, similar to other types of insurance, if you bundle lenders and title policies together, the title company is more likely to give you a better deal.
Do You Need Owner’s Title Insurance?
While the decision to purchase an owner’s title policy is ultimately up to you, there are many reasons why you should strongly consider spending the extra money to protect your interests.
- The home has had many prior owners. If a long line of people has possessed your property in the past, there’s more of a potential for someone to come out of the woodwork with a claim to your home.
- You wouldn’t be able to afford legal fees associated with disputing a potential claim to ownership. Even if the person’s claim to ownership has no merit, the cost of attorneys to litigate that can be expensive. With an owner’s policy, it’s up to the title company to provide your defense.
- You value peace of mind over a few hundred dollars. By having an owner’s title policy, you’ll know your investment in your home is always protected. Additionally, even if someone has a legitimate claim, you’ll have the money to go get a new place of your own.
How To Choose A Title Insurance Company
Your lender, lawyer, or real estate agent may recommend a title company for you. If you’d like to shop around and potentially save on closing costs, you have the right to do so.
According to the Consumer Finance Protection Bureau, your lender is required to give you a list of companies in your area that provide the closing services you can shop for, which includes title insurance. You may also want to search online or ask trusted friends or family which providers they’ve used in the past.
The bottom line is that when you shop for title insurance, you should know what you’re getting out of the process. Are they giving you a lender’s title policy or an owner’s title policy? If it is an owner’s title policy, what sort of coverage do you get? These are the important questions.
Now that you know how a title works, go forth and secure a mortgage with confidence. If you’re ready to buy or refi, you can do so online with Rocket Mortgage® by Quicken Loans®. You can also give one of our Home Loan Experts a call at (800) 785-4788.