One of the biggest players in any real estate transaction is the title company. The title company serves multiple roles, all of them crucial to the closing process. Primarily, title companies exist to protect the parties involved, particularly the buyers and their mortgage company. Here is what you need to know.
Title companies issue title insurance. When a buyer purchases a property, ownership title transfers from the seller to the buyer via a document known as a deed. The name of the new owner of the real estate is recorded into official government documents at the county Register of Deeds where the property is located. But sometimes things happen in the history of a property that “encumber” ownership. Unpaid property taxes are an example. In this instance, the taxing authority places a tax lien — a claim on — the property, which stops the sale and title transfer until the taxes are paid. Similarly, contractors who worked on the property and were never paid can have so-called “mechanic’s liens.” The title company searches official records for any liens, access restrictions and encroachments that need to be remedied before the property can close and the title can transfer. After the title company is satisfied the title is clear and marketable, it issues a title insurance policy that protects the interested parties against defects on the title found after the closing.
Title insurance protects two parties to the transaction. Two parties in a real estate transaction receive protection from a title insurance policy. First, the buyer is protected from spending a substantial amount of money into a property that has legal entanglements. The other protected party is the mortgage lender. Title policies cover either or both parties. Unlike other typical policies, title insurance protects the insured from an event that occurred before the policy was issued.
Title companies manage escrowed funds. In some states, the earnest money (or down payment) paid by the buyer is held by the title company until it is applied at closing or returned to the buyer under certain provisions of the sales contract dissolving. In other states, an attorney will have the responsibility of holding the earnest money in a trust account. At closing, the title company or attorney handles the dispersing of money to each party. Typically a closing officer working for the title company or the attorney brings all the legal documents to the closing, explains them to the buying and selling parties and gets all the proper signatures and notaries. Depending on the state, either the buyer’s real estate agent or the seller’s agent may have a title company they use regularly, but you are not bound by the recommendation.