Escrow companies and title companies are not the same. Depending on the state you live in, you may need one or both of them or even a real estate attorney.
While buying a home, you’ve probably heard the terms, title company and escrow company used interchangeably. However, a title company and an escrow company are not the same. To make it more confusing, a title company may provide escrow services but not the other way around. How do you keep it all straight?
An escrow company arranges the holding, managing, paying, and distribution of funds for two parties in a transaction. For a real estate transaction let’s say you are the new owners, this means that this is the company to which you send your earnest money deposit, where you or the bank send the rest of the funds to purchase the property, etc. If you are the seller, that means the escrow company will help you manage all the funds coming from the seller, making sure any concessions made while the home was under contract were followed through with, etc. They also ensure that both parties are fulfilling all their obligations as well as organizing necessary documentation for the transaction.
The title company is there to protect you from previous conflicts of ownership during a real estate transaction. They may verify that the seller of the property has the legal right to sell that property to the buyer. Title companies also provide escrow services, and closing services, as well as act as insurance agencies.
Title companies usually issue an insurance policy called title insurance. Title insurance’s purpose is to protect homeowners and their accompanying mortgage company from things like title claims that could happen involving any number of the property’s past owners. This could protect you from things like:
The list above is why for every real estate transaction we’ve taken part in we’ve had title insurance in place.
The title or deed is evidence of who lawfully owns a property. The title can be clean or clear if and only if the holder of the title owns the land lawfully, and there are no claims against the title by third parties like contractors or the government.
A claim against a title is called a lien. These are usually placed when the owner of a property does not pay their bills or taxes. The real kicker here is that if the lien is not paid off, in certain cases the lien holder can take ownership of the property.
Frequently in TV shows or the movies buying and selling a house is extremely dramatic. There are relatives that show up and claim to actually own the mansion, new home buyers that find out that their new house is haunted by years of back taxes from the previous owner, and the list goes on. As you can tell these are fictional stories, and make movies interesting.
The reason your long-lost uncle isn’t laying claim to your house on a daily basis is because of the work that title agents do to resolve any issues with the title as part of the title insurance process. The best part is that title insurance also works to help you after you’ve purchased the home as well.
A title search is the process of property ownership verification and confirmation of the seller’s ownership of the property. Title searches also verify the seller’s right to transfer ownership of the home.
The title company uses the title search to determine the chain of title. Which is the entire history of the ownership of the property. This allows them to search out and find all of the defects in the title as well as any liens against the property before they are willing to issue title insurance. If there are any title issues found by the title insurer they have the legal right to enforce all of them are cleaned up before issuing insurance.
A title officer’s job is to research top to bottom the public records of the ownership of a property. This information is normally provided in a preliminary title report. This report is given to all parties in the transaction (buyers, sellers, etc) and provide the status of the property’s title. It also provides the restraints in place for the title company to offer title insurance on the property. If the terms and conditions are able to be met, title insurance can then be issued.
Title insurance is there to protect you from losses that could occur from defects, liens, or title claims. A deed is actually the legal document declaring who owns a property and it has no real protection against title claims, liens, etc.
Hollywood has not done us a solid in their depiction of the deed. Growing up, I was under the impression that the deed to my parent's home needed to be guarded. When in all reality, they had title insurance when they purchased the home and there was no cause for concern.
Back in the 1800s, the ownership of property was hard to trace, record, and determine. This caused many to lose properties, land, and homes. Famously in the year 1868, Charles Muirhead, advised Mark Watson that a property Watson was in the process of acquiring had a clean title.
During the “title search” Muirhead's lawyer actually discovered a lien on the title, but the lawyer determined that the lien was invalid. Oops! Watson ended up losing his investment property, due to the previous lien on the property.
Watson sued Muirhead. The case made it to the Pennsylvania Supreme Court, and the ruling was in favor of Muirhead. He was not liable for mistakes that were made based on opinions from professionals.
Six years later, as a result of Watson v. Muirhead, the Pennsylvania legislature ended up passing an act that allowed for the creation of title insurance companies. Just two years later, the first title insurance company was incorporated by Joshua Morris and associates. Their first title insurance policy was for Morris’ aunt for a whopping $1,500. In today’s terms that was $42,198.
Outside of issuing title insurance title and escrow companies have many other responsibilities. Those responsibilities include managing the moving of funds as well as preparing the closing process for the real estate transaction.
The determination of the cleanliness of a title and that it is free of liens involves a title search. The agency scours public records looking for any liens, defects, or encumbrances. An encumbrance is if there is someone out there other than the owner of the property that is claiming ownership of the property. The defects that could affect a title are errors or omissions.
It isn’t easy to perform a title search. There are clues strewn across years and years of public records and they usually take a fair amount of digging to unearth and piece together. Kinda like a modern-day archaeologist. Here are just a few of the records that they may need to find:
Before the title company can issue title insurance, any problem that arises needs to be cleared. To clear a title can be as easy as requesting the removal of a lien that has already been fulfilled, or it could be fixing a typo. Sometimes co-owners are forgotten on a document, and adding them clears up the title.
As soon as the title is clear, the home buyer and their lender receive a title commitment. This document defines the terms of the title insurance, which is available after the transaction is closed.
The escrow company is in charge of the accounting side of the transaction and handles the movement of money between the different parties in the transaction. They have the responsibility of being a neutral third-party intermediary. They keep the money in an escrow account until the closing of the real estate transaction.
The escrow account accounting is extremely important, as the title company has to ensure the amount deposited into the escrow account is the same down to the penny that is withdrawn from the escrow funds. Once the transaction closes, the buyer and their mortgage lenders deposit money into the escrow account. The title company is then in charge of distributions to the seller, title company, realtor, and all other parties in the transaction.
Due to government regulations, there are reconciliations that must occur. This involves the escrow company matching every line item from internal records to the records the bank provides. This process ensures the lawful handling of funds by the escrow company. This mitigates the risk of theft, loss, or irresponsible actions.
Title and escrow companies prepare and then generate closing documents like the Closing Disclosure. If you have made a home purchase, this is the large folder of important documents that you are provided when you go to the closing table with the escrow agent, settlement agent, or title agent. The documents include the loan documents, purchase agreement, and many other documents. After signing the documents are provided to you, and some are sent to the local county recording office.
This depends entirely on where you live. There are some states where you can use a title company for the entire process. In other states, you use the combination of an escrow company and a real estate attorney for real estate closings. In the majority of states talk with your real estate agent and they will know how the process works in your state and might have recommendations of which companies to use.
If you live in a state where title companies are available, they are an easy one-stop-shop solution. If you already have an attorney doing work for you on your real estate transaction, an escrow company may be all you need.