Title Company vs Escrow: What's The Difference?
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In the home purchase process, there are numerous parties involved in the transaction and closing process, which can be an absolute nightmare for a new home buyer. From the mortgage lenders to the escrow agent to the inspector and appraiser, there are going to be a large number of people poking and prodding your home and your bank account. Two of the most important companies you'll work with are title companies and escrow companies.
While both companies play essential roles in a real estate transaction, they have different functions and responsibilities. Understanding the differences between these companies can help buyers and sellers better navigate the real estate transaction process.
What is a Title Company?
A title company is an essential player in the real estate industry. It is responsible for ensuring that a property title is valid and free of liens, judgments, or other encumbrances, via the reading and creation of legal documents. Title companies use public records to research the history of the property's ownership and ensure that the seller has the right to sell the property. If there are any title issues, the title company and title agent will work to resolve them before the sale can proceed. Think of them like your own real estate attorney during the real estate process, but for very specific instances like a title report or title searches.
Additionally, title companies issue title insurance policies that protect the lender and the buyer from any issues that may arise with the title in the future. Title insurance policies ensure that the lender has a valid lien on the property and that the buyer has clear ownership of the property. If any issues arise with the title after the sale is complete, the title insurance policy will cover any costs associated with resolving those issues.
What is an Escrow Company?
An escrow company is a neutral third party that manages the transaction process and ensures that all parties involved in the transaction meet their contractual obligations. When a buyer and seller agree to a real estate transaction, they typically place the funds and related documents into an escrow account managed by an escrow company. The escrow funds are held until all conditions of the sale have been met in the escrow process, and then the funds are released. Starting with the earnest money deposit, the escrow officer you work with will basically become #1 on your MySpace Top 8 until your home-buying process is complete.
The escrow company is responsible for ensuring that all parties involved in the transaction meet their contractual obligations. For example, the buyer must provide proof of financing and complete a property inspection, while the seller must provide a clear title and any necessary documents related to the property. The escrow company ensures that all these conditions are met before releasing the funds and documents to the appropriate parties.
The Differences Between Title Companies and Escrow Companies
While both title companies and escrow companies play important roles in a real estate transaction, they have different responsibilities. Here are some of the key differences between these companies:
A title company is responsible for verifying and insuring the property's ownership, while an escrow company manages the transaction process and ensures that all parties involved meet their contractual obligations.
A title company is typically owned by an attorney or a title insurance company, while an escrow company is typically owned by a neutral third party.
The cost of title insurance is typically paid by the buyer, while the cost of escrow services is typically split between the buyer and the seller (commonly referred to as "holy shit why are these closing costs so expensive?).
Title insurance policies protect the lender and the buyer from any issues that may arise with the title in the future, while escrow companies do not provide insurance.
Title companies may provide legal advice to their clients, while escrow companies are not authorized to provide legal advice.
Why Do You Need a Title Company and an Escrow Company?
When buying or selling a home, it is essential to have a title company and an escrow company involved in the transaction. A title company ensures that the property's title is valid and free of any liens, judgments, or other encumbrances that could affect the property's ownership. Title insurance policies protect the lender and the buyer from any issues that may arise with the title in the future.
An escrow company ensures that all parties involved in the transaction meet their contractual obligations. By holding onto the funds and related documents until all conditions of the sale have been met, the escrow company helps to prevent any fraudulent activity or misunderstandings between the parties involved in the transaction.
Together, title companies and escrow companies play essential roles in a real estate transaction. While the cost of their services may add to the overall cost of the transaction, they offer significant value by protecting the buyer and the lender from any issues that may arise with the property's title, as well as ensuring that all parties involved in the transaction meet their contractual obligations.
Choosing the Right Title and Escrow Company
When choosing a title and escrow company, it is essential to consider their experience, reputation, and customer service. Look for companies that have a strong track record of successfully managing real estate transactions, as well as those that offer excellent customer service and are transparent about their fees.
You can also ask for recommendations from your real estate agent, lender, or attorney, or do your research online to find reviews and ratings of different companies. It's a good idea to shop around, as these two players are absolutely critical to having a smooth transaction in the home-buying process for what might be the largest purchase of your life.
Title companies and escrow companies are two critical players in a real estate transaction throughout the entire process. While they have different responsibilities, they work together to ensure that the transaction process runs smoothly and that all parties involved in the transaction are protected. By understanding the differences between these companies, buyers and sellers can better navigate the real estate transaction process and make informed decisions about which companies to work with.