A Title Company: What Is It and Why Do You Need One?
When buying a home, a title company will protect you from a risk you’ve likely not thought about — a claim or lawsuit from a previous owner. Your deed won’t protect you from that risk, but title insurance will. A title company helps you ensure that the rights to the property are yours free and clear by providing title insurance, title search and settlement services.
What is a title company?
A title company may help protect you from past ownership conflicts with a home or real estate property. The title company verifies that the seller has the legal right to sell the property to a buyer. A title company can issue a policy, called title insurance, that protects homeowners and lenders from conflicts (like title claims) that may arise from the property’s previous owners.
What is a title?
A title represents your legal right to own, use and control real property. So, to legally transfer ownership of a home, you must determine that the home title is free of defects and unencumbered, which means no one else has claims to owning the property.
What is a title search?
A title search verifies property ownership and confirms that the seller has the right to transfer ownership of the home. A title company conducts a title search to uncover the “chain of title” — the full history of the home’s ownership — and find out all title defects and encumbrances before issuing title insurance.
What is a title officer?
A title officer will conduct the title search to investigate a property’s history and identify title defects. Title officers analyze records and conduct property surveys to determine any ownership or legal restrictions.
Deed vs. title insurance
While a deed is the legal document stating who owns a piece of property, it doesn’t protect you from claims by previous owners. Only title insurance can protect you against losses from title claims, defects or encumbrances. So, if you’re buying a home, you would need to have both a deed and title insurance to own your home free and clear.
Escrow company vs. title company
While a title company protects you and your lender from title defects, an escrow company handles the money used to purchase the home at a later date. As well as handling funds, an escrow officer will verify loan and contract paperwork, notify everyone about closing timelines, disburse closing funds and order title and property-related documents. In some states, the escrow officer can be an attorney or title officer.
What does a title company do before issuing title insurance?
Before it can issue title insurance, a title company must find out if the property has any title defects or encumbrances by conducting a title search on the property.
This title search involves the following steps:
Research public records errors, liens and encumbrances: Sometimes public record errors happen. For instance, a property release from a paid off mortgage goes unrecorded and results in a lien on the property. Or a previous owner employs contract work but doesn’t complete the payment, also resulting in a lien on the property. A title company will research these public releases and obtain necessary information from previous owners and lenders to confirm any liens on the property. It will also verify that any illegal deeds or forgeries aren’t enforceable.
Verify boundaries, legal description and easement of property: The last thing you want is an unfriendly neighbor making a dispute over the lines of your property. A title company verifies the dimensions of your property and its easements, which is the right to use the property of another.
Investigate forgeries, impersonations, illegal deeds and missing heirs: Another worry is that someone has a forged or illegal deed to your property, or a previous owner passed away without a will and has missing heirs that may claim your property as their right. A quitclaim is a document that transfers ownership from one person to another. A title company will analyze all of the documents related to fraudulent ownership transfers, such as quitclaims, and follow appropriate state laws to properly notify all heirs of the documents needed to release their interest in your property.
What is in a title commitment or preliminary title report?
A title report compiles all of a title company’s research as part of the title insurance process. The report contains three sections: Schedule A, Schedule B-1 and Schedule B-2.
Schedule A. This section lays out all the facts about the purchase or refinance: These include title certification date, information on the insured, the type and amount of insurance being issued and how current owners hold ownership, referred to as title vesting.
Schedule B-1. This section summarizes the documentation that parties need to provide before the title company can issue title insurance. These documents can include: releases of tax liens, deeds of trusts from previous owners, estate documents, power of attorney documents, death certificates of owners who passed away, judgments and corrections.
Schedule B-2. This section lists the items that the title company won’t insure. The typical exceptions include easements, mineral reservations and covenants, conditions and restrictions (CC & Rs), which are restrictions created by the original landowner.
What does a title company do for a house at closing?
A title company may also help you navigate any necessary changes before closing, like a change in final loan amount or the addition of a cosigner. A title officer will reissue documents to reflect any changes. In addition, if you decide to put your property under the name of a trust, LLC or partnership, a title officer will need to review legal documents to ensure they align with title insurance guidelines. Finally, a title officer will verify your identity at closing by review documentation, such as a driver’s license or passport.
What is title insurance?
Unlike typical insurance policies, which protect you against potential future events, title insurance protects you from the property’s history. In particular, title insurance protects you, as a property owner, from financial losses or legal costs from claims or lawsuits related to previous owners.
Types of title insurance: Owner’s title insurance vs. lender’s title insurance
There are two common types of title insurance, owner’s title insurance and lender’s title insurance. Below is a breakdown of the differences between the two.
|Lender's Title Insurance||Owner's Title Insurance|
|Do you need it?||Yes, required by the mortgage lender||Optional if you're buying a home without a mortgage|
|What does it cover?||Covers the amount of mortgage. This policy only protects the lender.||Covers the amount you paid on the home. This policy protects the homeowner.|
|How does coverage last?||Until you pay off your mortgage||As long as you own the home, even if you refinance it.|
While you aren’t required to purchase owner’s title insurance, it can give you lasting peace of mind since it lasts as long as you own the home. Consider title companies that bundle lender’s and owner’s policies, you might get a discount.
Who pays for lender’s title insurance?
As a home buyer, you would need to pay for lender’s title insurance, even though it only protects a mortgage lender’s interest in a home and not the homebuyer’s equity. If you’re taking out a mortgage, your lender will require you to take out lender’s title insurance for the amount of the loan.
Title insurance vs. homeowner’s insurance
While title insurance will protect you from the home’s past issues in ownership rights, homeowner’s insurance will protect your home from future issues, such as damage from theft or fire. Lenders will likely require proof of homeowner’s insurance, so when you take out a mortgage, expect to pay for both lender’s title insurance and homeowner’s insurance.
How much is title insurance?
The average cost of title insurance is $1,000, but that cost varies by state, type of policy and coverage amount. Here is a breakdown of the costs depending on policy type:
- Lender’s title insurance and owner’s title insurance together: 0.5% to 1% of the purchase price for a lender’s and owner’s policy together
- Lender’s title insurance only for a refinance loan: About 0.5% of the loan balance
Some states, including Texas and Florida, have title insurance premiums fixed by the government. In Texas, a $100,000 policy would cost $832, which is less than 1%. Iowa’s government underwrites title insurance policies, which leads to premiums as low as $110 for a $500,000 policy.
How do I choose a title company?
If you live in a state that doesn’t have fixed title insurance rates, then you should shop around for a good deal. Use referrals from your friends, family or real estate agent. With your homeownership rights on the line, it’s important to find a title company with great customer service and reviews. You should also look to find discounts in bundling lender’s and owner’s policies whenever possible. Lastly, consider negotiating the title insurance costs with the seller at closing, but be careful if you’re in a competitive market.