Escrow Company vs Title Company: What's the Difference?
When you buy a home, there are a lot of moving pieces and a lot of involved parties. While you may think that the only people involved in a real estate transaction are the real estate agent, buyer, and seller, this is far from the truth. There are more than a handful of entities involved in every sale of a home, and they all play very important roles in the closing process.
Two of the entities that often get confused are the escrow company and the title company. While in reality title companies and escrow companies are entirely different things, they are sometimes mistaken to be the same thing. This post is going to outline the key roles and services that each type of company provides, how the two can overlap, and where they differ.
What Is an Escrow Company?
An escrow company is a neutral third party company that provides escrow services. The escrow process exists in almost every industry, but in personal real estate, it is a process designed to protect the financial interest of both buyers and mortgage lenders throughout a sales transaction.
Essentially, an escrow agency exists to protect the financial interests of both sides of the home-buying process. The purchase of a home requires a lot of upfront cash from a buyer, and it is important for lenders and other involved parties to know that the money is fully available and able to be spent. On the flip side, buyers care that their money is safe and that the other parties deliver their services correctly and on time.
When money goes into escrow, it is held in a third-party account that is regulated to ensure that the buyer pays their fees and dues on time and that the service providers do their job correctly at the same time. The buyer transfers a full specified amount into the escrow account (the escrow deposit) to prove that they have the cash, and the escrow funds are only released by the escrow agent to the appropriate service providers once the services are delivered. In this way, the escrow officer oversees the financial transactions and subsequently protects both the buyer and the seller.
What Is a Title Company?
Title companies, or title insurance companies, are one of the most important actors in the new home purchase process. They provide services that help both the home buyer and the home seller. In short, the main role of a title insurance company is to research the house's title and make sure that the property is unencumbered and ready to be sold. When we use the term title, we are referring to the official document that records the ownership and financial history of the property.
The title agent's job is to review public records and the history of the property to guarantee the chain of title and confirm that there are no title issues. These title searches make sure that the seller has the legal right to sell the house, that there are no liens on the property, and that there is a clear, documented chain of previous owners.
In addition to doing this research, a title insurer may also offer title insurance policies, which protect buyers against unforeseen title defects or future claims against the buyer's ownership of the property.
A title policy can be purchased by both a mortgage lender and a buyer. The owner's title insurance policy protects the owner against property ownership disputes in the future, and the lender's policy offers the same protection to the mortgage lender.
Finally, title companies often help with a large amount of the paperwork involved with the real estate closing process. There is a slew of loan documents and other legal documents that are completed throughout the closing process, and title companies often help to complete these forms and expedite the closing process.
What Is the Difference Between a Title Company and an Escrow Company?
An escrow company is any company that provides escrow services, while a title company offers a much wider range of services to buyers and sellers throughout the closing process. Title companies conduct research that protects the new owners and their mortgage broker long after the transaction is complete. Generally speaking, escrow companies provide no services throughout the entire process other than the independent third party monitoring of funds.
In addition to making sure the property has a clear title, a title company may provide escrow services for the buyer, seller, and mortgage company for an additional cost. Not every title agency offers escrow services, but many do.
Do You Need to Work with a Title Company?
Technically speaking, you do not need to work with a title company. You can choose to cut costs and not employ the services that title companies provide. However, the savings are minimal compared to the potential future costs that could arise from not using a title company.
Title companies make sure that the property's title is clean and that there are no hidden surprises that could arise down the line. If the property has a clean title, the buyer can rest assured knowing that they are purchasing full ownership of the house and that there will be no claims against the legitimacy of the sale in the future.
An example of the negative consequences of not using a title company could look like this. A buyer purchases a house from a seller who inherited it when their mother passed away a year prior. The seller thinks the house was fully left to them in their mother's will, and that they have the full right to sell it.
Three years later, the seller's long-lost sister reappears and stakes her own claim on the 50% of the house to which she claims she is entitled. If this claim is valid, the buyer would have to negotiate ways to provide the sister with the half of the property that she is demanding.
Had the buyer worked with a title company in the first place, the company would have likely seen this risk ahead of time, taken actions to investigate it, and avoided the conflict altogether. If they had not identified this as a risk, they would have likely offered the buyer a title insurance policy that would step in to protect the buyer in this case.
What Percent of Closing Costs Go to the Title Company?
The title company provides many services to the buyer and seller at closing and naturally gets compensated pretty well for them. Closing costs are usually equal to about 3-6% of the selling price of the home, and the title company earns the brunt of that amount.
While title companies provide many of the services that contribute to closing costs, they do not provide them all. Title companies do not sell homeowner's insurance, for example, and they may not handle the home inspection or the payment of initial property taxes. There is a wide range of services that are offered within the title industry, and it is always a good idea to work with one.
Thank you for reading our post about the differences between an Escrow Company vs a Title Company. We hope that this post has been helpful in explaining the key differences and similarities between these two important pieces of the real estate process. Every home purchase requires the use of escrow services, but working with a title company is optional. With that being said, it is always a good idea to work with a title company, as their work can offer you maximum protection from title claims in the future.
If you decide to visit Myrtle Beach or any other place in South Carolina and fall in love, reach out to us for help. We at The Boyd Team are always here to help you figure out whether Myrtle Beach is your next home or not, and we are committed to helping you find the right property for your needs and dreams. Any question that you have about moving to the area and finding your dream home by the beach is our pleasure to answer. Feel free to send us an email at firstname.lastname@example.org or text or call us at (843) 222-8566, and we will get back to you as soon as we can. Being true natives of the Grand Strand and Horry County and with over 25 years of experience in the local real estate market, whether buying or selling, we can help you make your dreams a reality.
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