Title and escrow basics form the foundation of every real estate transaction. Homebuyers often hear these terms during the closing process but may not fully understand what they mean. A title proves legal ownership of a property. Escrow protects both buyers and sellers by holding funds and documents until all conditions are met. This guide explains how title and escrow services work, why they matter, and what homebuyers should expect during their purchase.
Key Takeaways
- A title represents legal ownership of a property, while escrow protects both buyers and sellers by holding funds until all transaction conditions are met.
- Always ensure a clear title before closing—issues like unpaid taxes, liens, or boundary disputes can delay your purchase or cause legal problems.
- Title insurance is a one-time cost at closing that protects against hidden defects in ownership history, with owner’s policies highly recommended for buyers.
- The escrow process includes opening an account, meeting contingencies, collecting documents, and distributing funds once all conditions are satisfied.
- Homebuyers can shop around for title and escrow providers to compare fees and potentially save hundreds of dollars on closing costs.
What Is a Title in Real Estate?
A title represents legal ownership of a property. It is not a physical document but rather a concept that proves someone has the right to own, use, and sell real estate.
When someone buys a home, they receive the title from the seller. This transfer happens through a legal document called a deed. The deed records the change in ownership and becomes part of the public record.
Types of Property Titles
Several types of titles exist in real estate:
- Fee simple absolute: The most complete form of ownership. The owner has full control over the property.
- Joint tenancy: Two or more people own the property together with rights of survivorship.
- Tenancy in common: Multiple owners hold separate shares of the property.
- Community property: Married couples share equal ownership in states that recognize this arrangement.
Why a Clear Title Matters
A clear title means no one else has claims against the property. Problems with a title can include:
- Unpaid taxes or liens
- Boundary disputes
- Errors in public records
- Undisclosed heirs
- Fraud or forgery
These issues can delay or stop a sale. They may also create legal problems for buyers after closing. That’s why title searches and title insurance exist, to protect against these risks.
Understanding Title Searches and Title Insurance
A title search examines public records to verify ownership and uncover any problems with a property’s title. Title insurance protects buyers and lenders if issues arise later.
How Title Searches Work
Title companies or attorneys perform title searches before closing. They review:
- Deed records
- Court records
- Property tax records
- Mortgage documents
- Judgment and lien records
The search traces the property’s ownership history, sometimes going back decades. Researchers look for anything that could affect the buyer’s ownership rights.
A title search typically takes a few days to two weeks. The title company then issues a preliminary report listing their findings.
What Title Insurance Covers
Title insurance protects against financial loss from title defects that weren’t found during the search. Two types of policies exist:
- Lender’s title insurance: Protects the mortgage lender’s investment. Most lenders require this policy.
- Owner’s title insurance: Protects the buyer’s equity in the property. This policy is optional but highly recommended.
Unlike other insurance that covers future events, title insurance covers past events that weren’t discovered before purchase. A one-time premium is paid at closing, and coverage lasts as long as the owner or their heirs have an interest in the property.
Title insurance can cover legal fees if someone challenges ownership. It may also pay for losses if a covered claim proves valid.
What Is Escrow and How Does It Work?
Escrow is a financial arrangement where a neutral third party holds money and documents during a real estate transaction. The escrow agent releases these items only when both buyer and seller meet all agreed-upon conditions.
The Escrow Process Step by Step
- Opening escrow: After the buyer and seller sign a purchase agreement, they select an escrow company. The buyer deposits earnest money into the escrow account.
- Meeting conditions: Both parties work to satisfy contingencies. The buyer may need to secure financing and complete inspections. The seller may need to make repairs or clear title issues.
- Document collection: The escrow agent gathers all necessary documents, including loan papers, the deed, and insurance policies.
- Closing: Once all conditions are met, the escrow agent distributes funds and records the deed. The buyer receives the keys.
Escrow Accounts After Closing
Many lenders require buyers to maintain an escrow account after closing. Each month, part of the mortgage payment goes into this account. The lender uses these funds to pay property taxes and homeowners insurance when they come due.
This arrangement benefits both parties. Buyers avoid large lump-sum payments. Lenders ensure that taxes and insurance stay current, protecting their investment in the property.
Key Differences Between Title and Escrow Services
Title and escrow services often work together, but they serve different purposes. Understanding these differences helps homebuyers know what to expect.
| Aspect | Title Services | Escrow Services |
|---|---|---|
| Primary function | Verify and protect ownership | Hold funds and documents |
| Main activities | Title searches, insurance | Managing transactions |
| Protection focus | Ownership rights | Financial security |
| Duration | Ongoing (title insurance) | Transaction period |
Who Provides These Services?
In some states, one company handles both title and escrow. In others, separate companies perform each function. Attorneys may also provide these services depending on state requirements.
The real estate agent or lender often recommends title and escrow providers. But, buyers can shop around and choose their own companies. Comparing fees can save hundreds of dollars.
Costs to Expect
Title and escrow fees vary by location and property value. Typical costs include:
- Title search: $75 to $200
- Title insurance: 0.5% to 1% of purchase price
- Escrow fees: $500 to $2,000
These costs appear on the closing disclosure that buyers receive before closing. Reviewing this document carefully ensures no surprises at the closing table.
