When you're buying a home, you'll work with several professionals along the way. Your real estate agent helps you find the right property, your mortgage lender helps arrange financing, and a title company helps make sure the home can legally be transferred to you.
But what exactly does a title company do, and why is its role so important?
One of its biggest responsibilities is conducting a title search. This process helps uncover potential ownership issues, unpaid debts, or other claims against a property before you become its new owner.
Here's what homebuyers should know about title companies, title searches, and title insurance before closing.
What Is a Title Company?
What Is a Title Company?
A title company is a third party that helps verify a property's legal ownership and coordinate important parts of the homebuying process.
Depending on the state and transaction, a title company, title agency, attorney, or settlement agent may handle these responsibilities.
Its work generally includes:
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Researching the property's ownership history.
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Conducting a title search to identify liens, claims, or other potential issues.
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Arranging title insurance policies.
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Preparing or coordinating closing documents.
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Facilitating the transfer of ownership.
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Handling closing funds and recording documents, when applicable.
Essentially, the title company helps make sure the property can be transferred properly and that the necessary legal and financial details are addressed before closing.
The bottom line
Title companies play a big role in the home buying process, and lenders work closely with them along the way. Title issues can cause problems and delays in your home buying process, so it’s important to know how all you can about these companies. Do you have more questions about a title company’s work? Need recommendations for experienced title companies in your area? Reach out to an Embrace Home Loan office in your area today.
What Is a Title Search?
A title search is a review of public records to verify a property's ownership history and identify any outstanding claims or legal issues that could affect the transfer of ownership.
When you purchase a home, you want to know that the seller has the legal right to sell it and that no unresolved claims could interfere with your ownership.
A title company researches the property's records, which may include previous deeds, mortgages, tax records, court judgments, and other recorded documents.
The goal is to identify potential problems before the sale is finalized.
What Does a Title Search Look For?
A title search can uncover several types of issues that may need to be resolved before closing.
1. Outstanding Mortgages
If the current owner still has a mortgage on the property, the title company will identify it. The existing mortgage generally needs to be paid off as part of the sale so the new buyer can receive ownership without that prior mortgage remaining as a lien.
2. Unpaid Property Taxes
Unpaid property taxes can result in a lien against the home. These balances may need to be addressed before ownership can transfer.
3. Contractor or Mechanic's Liens
If a previous owner had work completed on the property but failed to pay the contractor or supplier, a lien may have been placed against the home. The title company looks for these recorded claims.
4. Judgment Liens
A court judgment related to an unpaid debt may create a lien against a property. These claims can complicate a sale and may need to be resolved before closing.
5. Ownership or Recording Errors
Sometimes public records contain mistakes, missing documents, or discrepancies in previous ownership transfers. These issues may need to be corrected to establish a clear chain of ownership.
6. Easements and Property Restrictions
A title search may also identify recorded easements or restrictions that affect how a property can be used. For example, an easement may give a utility company the right to access a portion of the property.
What Happens If a Title Search Finds a Problem?
Finding an issue doesn't necessarily mean the home sale cannot move forward.
The title company will typically investigate the issue and work with the appropriate parties to determine what needs to happen next. Depending on the situation, this could involve:
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Paying off an outstanding debt or lien.
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Obtaining a lien release.
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Correcting an error in public records.
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Obtaining additional documentation.
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Resolving an ownership dispute.
Some issues can be resolved before closing, while others may require additional time or legal assistance.
This is one reason a title search is so important. Identifying potential problems early gives the parties an opportunity to address them before the transaction is finalized.
What Is Title Insurance?
Even after a thorough title search, certain ownership issues may not be discovered until after a home purchase is complete.
That's where title insurance comes in.
Title insurance is designed to protect against certain financial losses resulting from covered title defects or claims that existed before the policy was issued.
There are two main types of title insurance:
Lender's Title Insurance
If you're getting a mortgage, your lender will generally require a lender's title insurance policy.
This policy protects the lender's financial interest in the property if a covered title issue arises. It does not protect your personal ownership interest.
Owner's Title Insurance
An owner's title insurance policy can help protect you, the homebuyer, against covered title issues that may arise after closing.
For example, a previously undiscovered ownership claim, unpaid lien, or recording error could potentially create a problem after you've purchased the home.
An owner's policy can provide protection against certain covered losses and may cover legal expenses associated with defending your ownership rights, subject to the policy terms and exclusions.
While lender's title insurance is generally required when financing a home, owner's title insurance is typically optional. Your title company can explain the available coverage and costs so you can make an informed decision.
What Else Does a Title Company Do Before Closing?
A title company's responsibilities often extend beyond researching ownership records.
Depending on the transaction and local practices, it may also help coordinate several important closing activities.
Prepare Closing Documents
The title company or settlement agent may prepare or coordinate documents needed to complete the property transfer and mortgage closing.
Coordinate the Transfer of Funds
At closing, money needs to be distributed to the appropriate parties. This may include paying off the seller's existing mortgage, covering applicable fees, and transferring the remaining proceeds to the seller.
Record the New Deed
Once the transaction is complete, the deed transferring ownership to the buyer is generally submitted to the appropriate local government office for recording.
This creates the public record of the new ownership.
Help Coordinate Closing Day
In many transactions, the title company or settlement agent helps coordinate the closing appointment, signatures, documents, and funds so the transaction can be completed.
When Does the Title Company Get Involved?
A title company typically becomes involved after a purchase agreement is signed and the home moves toward closing.
The title search and related work happen while other parts of the mortgage process are underway, including the appraisal, underwriting, and final loan preparation.
If the title search identifies an issue, the title company works to help resolve it before closing. That's why it's important to complete this step early enough to allow time for any necessary follow-up.
Why Is a Title Company Important When Buying a Home?
Buying a home is a major financial commitment. You want to know that the property you're purchasing can legally be transferred to you and that potential ownership issues have been identified.
A title company helps provide that assurance by researching the property's history, identifying potential claims, coordinating title insurance, and helping complete the transfer of ownership.
While much of its work happens behind the scenes, it's an important part of protecting the homebuying transaction.
Getting Ready to Buy a Home?
There are a lot of moving parts between having an offer accepted and receiving the keys to your new home. Understanding the role of each professional can help you feel more confident throughout the process.
At Embrace Home Loans, we're here to help guide you through the mortgage process, answer your questions, and keep you informed along the way.
If you're thinking about buying a home, connect with an Embrace Home Loans loan officer to explore your mortgage options and take the next step toward homeownership.
Title search procedures, title insurance requirements, and closing responsibilities vary by state and transaction. Title insurance coverage is subject to the terms, conditions, and exclusions of the policy.
