When it comes to a real estate transaction, there are a lot of different options for handling the details associated with getting a deal closed. The two most common methods are title companies and escrow services. So, what’s the difference?
These two terms are often confused because there is so much overlap in what they do. The concept of escrow is what leads to much of this confusion.
In a real estate transaction, the term escrow usually refers to an escrow account. This account is used to safely hold funds like earnest money, or deposits related to a real estate transaction.
In a real estate transaction, an escrow account is set up by an independent third party with no financial interest in the real estate transaction (escrow service or title company).
If the buyer defaults, that earnest money goes from the escrow account to the seller. If on the other hand the transaction proceeds to closing the escrow funds are dispersed at the closing table per the terms of the contract.
An escrow service or escrow company primarily holds earnest money and is responsible for overseeing any legal documents and funds related to the closing process. This includes collecting the initial earnest money check, loan documents, and signed deed.
Escrow is a process that helps to ensure that both parties in a transaction will be able to fulfill their obligations, this process if administered by an escrow officer. The escrow officer is a third party who helps to make sure that a real estate transaction goes smoothly by overseeing the terms of contracts. They are respected by all parties involved in a real estate transaction,
While the escrow agent cannot administer real estate closings or provide title insurance, they are responsible for obtaining and organizing all of the funds and documents related to the transaction.
The title company does all of this and more. A title company is an insurance company that provides title insurance, escrow services, and closing services for real estate transactions. The title company is responsible for conducting a title search, issuing titles, and managing the escrow process through to closing.
The title company acts as a third-party intermediary between the buyer and seller. The third party can hold the money for the purchase until all parties have completed their due diligence, and are ready to close the transaction.
Once the title company receives the executed purchase agreement or sales contract for your new home, they begin gathering information about the chain of ownership and collecting tax records, loan payoff amounts, outstanding mortgages, homeowner/maintenance fees, inspections/reports, and hazard insurance policies.
The search for title issues or title clouds or defects includes public records, deeds, mortgages, paving assessments, liens, and other documents affecting the title to the property. A critical step in this process is when verification of the legal owner is made and the debts owed against the property or its previous owner are determined. Upon completion of this process, a title commitment/ preliminary report is prepared which will be reviewed and sent out to interested parties.
The closing agent reviews the new lender's instructions and requirements, key instructions from other parties to the transaction, real estate, and loan documents, and charges. The title agency will prepare all closing statements, issue a title commitment, and schedule the closing.
The closing is overseen by the title company and settlement agent and it entails that the seller, buyer, real estate agents, and sometimes attorneys are present to sign critical documents. Among other documents, the seller signs the deed and closing affidavit, and the buyer signs a new note and mortgage.
After the signing is complete, the title company will follow the terms of the contract and lender instructions to disburse all funds. The transaction documents are recorded in the county where the property is located. Title insurance policies are prepared and sent to the new lender and buyer.
There will most likely be a lender requirement for a title policy to cover both the buyer and the lender. Since the title company is primarily an insurance company, it will issue the owner’s title insurance policy as well as the lender’s policy. Any title insurance premiums will be paid at the time of closing.
One easy way to remember the difference is that a title company can provide escrow services as well as title insurance and closing services. An escrow service on the other hand cannot provide title insurance or closing services.
The answer to this question depends on where you live, some states use title companies for everything while other states use escrow companies and close with a real estate attorney. In most states you're a real estate agent will be able to give you guidance as to whom to use for title, escrow, and closing services.
The only major differences between an escrow service and a title company are the issuance of a title insurance policy, and the ability to close the transaction. Only the title company can provide those additional services.
So, if you are looking for a one-stop-shop, the title company is the way to go. If on the other hand you have an attorney involved in your transaction and need somebody to do the administrative work around documents and money, an escrow service will do just fine.
You'll still need a title insurance policy for your lender if you are getting a loan, and an owner’s policy for yourself, this will require a title insurance company.
Title and escrow are both excellent ways to administer a real estate transaction. The title company is certainly a good one-stop solution but not all states recognize this process. Many states still use a licensed attorney to write contracts and administer closings. If this is the case in your state you will most likely end up using an escrow service for those portions of the transaction your attorney doesn’t handle. You will still need to talk with a title agent in order to obtain title insurance for both yourself and the mortgage lender if you have one.
Your Realtor should lead the way when it comes to whether you are using a title company or an escrow service.
Although prices and fees for title companies are generally regulated in the insurance industry, you will still need to look at your closing costs and escrow amounts that will be dedicated to taxes and insurance.
Property taxes and insurance are a part of the pre-paid closing costs. The escrow fees required to fund this account is set up and determined by the mortgage lenders, not the title company or escrow service. As the home buyer, you are responsible for funding this account, so make sure you review and understand the amounts and purpose of this account.
If you have any questions about these fees and escrow amounts, your lender should be able to explain them to you.