What Does A Title Company Do?
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When buying 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.
Let’s take a look at what title companies are, the services they provide and insurance they offer.
What Is A Title Company?
A title company provides a variety of title services to satisfy buyers’ and lenders’ concerns about clear title. It performs a title search, prepares documentation for closing, and often offers title insurance to back up their title research findings, should anyone make 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.
Understanding The Difference Between A Title And A Deed
It’s important to understand the difference between a title and a deed.
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, and it is filed with the property clerk and made available to the public.
Title refers to the rights that parties with ownership interests hold. You can compare it to a book or movie title, in the sense that the title is a concept, not the physical object. It gives rise to intellectual property in the same way that ownership offers you certain property rights.
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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 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 other encumbrances that could interfere with your ownership of the property.
Unless the previous home is owned free and clear, the current homeowner will have a mortgage lien on the property. This will need to be paid off at closing so that the title can be transferred to you.
Other Debts Secured By The Home
You could have a lien on the property because you took out a home equity line of credit or you financed the cost of 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 on your property – because of unpaid HOA dues. The home seller will need to resolve their dues balance so the lien can be lifted, or the buyer will become responsible for paying those dues if the sale goes forward.
Unpaid Property Or Income Tax Liens
Governments can place a lien on a deed if the homeowner fails to pay required taxes. Usually, a local government places a lien on property for unpaid property taxes. It can also bring an action in foreclosure to force the sale of the property for tax repayment.
The Internal Revenue Service (IRS) will also place liens on real and personal property when a taxpayer fails to pay owed income taxes. It too can force a sale of property to recoup those tax payments.
Both types of tax liens must be resolved before closing.
If a contractor, their subcontractor or their employees weren’t paid for work that was completed, either on the property or the house itself, a mechanic’s lien might be imposed on the property.
Unpaid debts for repairs done on the property stay with the property.
Anything that restricts the free transfer of ownership in a property that can cause problems in the future. For example, buying a home in a 55+ community means you can’t sell your home to anyone under 55, which is a restriction.
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.
Is the property rented out to anyone for a specified term? If it is, you can’t interfere with their lease rights when you buy the home.
A title search will reveal whether the property is encumbered with a lease.
Conduct A Property Survey
If required, the title company will order a property survey, or a drawing of the property. The aim of this is to discover any potential encroachments – for example, if a neighbor’s home addition intruded into your property.
An encroachment can give rise to a claim of adverse possession if it goes unaddressed. That means that, if the homeowner does nothing to resolve the encroachment, they could lose the affected portion of their property.
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.
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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.
Lender’s Title Insurance
Lender’s title insurance is meant to protect the mortgage lender if there’s an issue down the line involving title disputes. Mortgage companies require this because if something does go wrong, the insurance policy covers the loan amount.
It’s important to realize that while it’s required, lender’s title insurance doesn’t protect the homeowner or their existing equity in the home.
The lender’s title insurance policy premium is typically purchased by the buyer, but there are some real estate markets where the seller pays in accordance with local custom.
Owner’s Title Policy
To protect themselves, home buyers need to invest in an owner’s title policy. Unlike a lender’s title policy, an owner’s title policy provides you with protection for the equity you built up over the months or years in your home should a title claim emerge.
Home buyers should ask the home seller to provide title insurance for the buyer’s benefit to back up the warranties made by the transfer of a general warranty deed. If sellers are unwilling to do so, home buyers might want to pay for their own title insurance policy.
An owner’s title policy is optional. For a relatively low cost, it protects your investment in the property.
How Title Insurance Works
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.
For example, your home was built on property that was part of a farm 50 years ago. In their original will, the farmer split property ownership equally between their two children. However, in a later will, they disowned one child in favor of the other, who sold the farm to a developer.
Later, the disowned child finds proof that their sibling exerted undue influence on the farmer when the second will was executed and brings a successful lawsuit to restore the first will. Now, they could have a claim to property you’ve purchased in the interim.
Title insurance will cover your legal costs and will reimburse you for any losses due to title issues. You could choose to forgo title insurance and sue the previous owner, who made warranties regarding the title at the time of transfer, but you’d have to find them first and then bear the expense of bringing a lawsuit against them.
How Much Do Title Services Cost?
When you get your initial approval, or preapproval, from a lender, you will also receive a Loan Estimate form that offers the lender’s best approximation of what your closing costs will be. You’ll see an estimate for title insurance, but this is an item you can shop around for, which could significantly lower this part of your closing costs.
According to the National Association of REALTORS®, title services generally cost up to $2,000, although it often depends on how many quotes you get. Some of the factors that affect the cost include:
- The loan amount
- The price of the home
- Your geographic area
Finally, similar to other types of insurance, if you bundle the lender’s and owner’s 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 you should strongly consider spending the extra money to protect your interests.
Owner’s title insurance settles any debate if 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.
To dispute a potential claim to ownership, you’d have to pay exorbitant legal fees. 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 title insurance policy, it’s up to the title company to provide your defense.
Peace Of Mind
It is worthwhile if 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 Real Estate 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
When you shop for title insurance, you should know what you’re getting out of the process. What a title company does can seem obscure or unnecessary, but it’s a vital part of the home buying process. Your lender will require a clean title and a title insurance policy for their benefit. When you buy your lender’s insurance, getting a policy for your own benefit is a good idea to protect you should a claim arise in the future.
Ready to get started on your home buying journey? Apply online now and get your initial approval process started. You can also give one of our Home Loan Experts a call at (800) 785-4788.