A Title Company: What Is It and Why Do You Need One?

When you’re 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. A title company helps ensure that the property rights are yours free and clear by providing title insurance, title search and settlement services. Below, we’ll cover what you should know about title companies, including what purpose they serve and why they’re vital to the homebuying process.

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 home 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 mortgage 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 in order to legally transfer ownership of a home, you must determine that the house title is free of defects and unencumbered, which means that no one else has claims to own 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 a 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 a 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’d 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. In some states, an escrow officer can be an attorney or title officer.

In addition to handling funds, an escrow officer will:

→ Verify the loan and contract paperwork
→ Notify everyone about closing timelines
→ Disburse closing funds
→ Order title and property-related documents

What does a title company do?

One of the main roles of a title company is to issue title insurance. But before the company can issue a policy, it must conduct a title search to determine whether the property has any title defects or encumbrances.

This title search involves the following steps:

→ Researching public records errors, liens and encumbrances: Sometimes public record errors happen. For example, a release of a paid-off mortgage might not be recorded, leaving a lien on the property. Similarly, if a previous owner hired a contractor but didn’t pay in full, it could result 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.
→ Verifying the boundaries, legal description and easement of property: The last thing you want is an unfriendly neighbor making a dispute over your property lines. A title company verifies your property dimensions and its easements, which is the right to use the property of another.
→ Investigating 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 died without a will and has missing heirs that may claim your property as their right. A title company will analyze all of the documents related to fraudulent ownership transfers, including quitclaims — documents that transfer ownership from one person to another — and follow appropriate state laws to 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 the 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 must provide before the title company can issue title insurance. These documents can include:

• Releases of tax liens
• Deeds of trust from previous owners
• Estate documents
• Power of attorney documents
• Death certificates of owners who died
• 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 rules the original landowner created.

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What does a title company do at closing?

A title company may help you navigate any necessary changes during the closing process, like adjusting the final loan amount or adding a cosigner. A title officer will reissue documents to reflect any changes. In addition, if you decide to put your property under a trust, LLC or partnership, a title officer must review legal documents to ensure they align with title insurance guidelines. Finally, a title officer will verify your identity at closing by reviewing 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

There are two main kinds of title insurance — owner’s title insurance and lender’s title insurance. Below is a breakdown of the differences between the two.

You aren’t required to purchase owner’s title insurance — still, it can give you lasting peace of mind, since it lasts as long as you own the home. Consider title companies that offer a discount for bundling lender’s and owner’s policies.

Who pays for lender’s title insurance?

As a homebuyer, you’d 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 loan amount.

Title insurance vs. homeowners insurance

While title insurance will protect you from the home’s past issues in ownership rights, homeowners insurance will protect your home from future issues, such as damage from theft or fire. Lenders will likely require proof of homeowners insurance, so when you take out a mortgage, expect to pay for both lender’s title insurance and homeowners insurance.

How much is title insurance?

The average cost of title insurance ranges from 0.5% to 1% of the home’s sale price, but that cost varies by state, policy type and the coverage you require.

Here is a breakdown of title company costs depending on the services you need:

→ Title search: $100 to $250
→ Deed preparation: $85 to $100
→ Land survey: $200 to $800

Some states regulate title insurance premiums. Iowa’s government, for example, underwrites title insurance policies, which leads to premiums as low as $175 for coverage worth up to $750,000.

How do I choose a title company?

If you live in a state without fixed title insurance rates, you should shop around for the best deal. Ask for referrals from your friends, family or real estate agent. With your homeownership rights on the line, finding a title company with great customer service and reviews is important. Lastly, consider negotiating the title insurance costs with the seller at closing, though this might be challenging in a competitive housing market.