Title company vs Escrow: What is the difference?

Title company vs Escrow: What is the difference?

A title company has a title agent perform a title search to ensure a seller has the legal right to sell a property. The Escrow process holds funds until the previous owner and new owners fulfill the terms of the contract and provide all necessary legal documents. Both act as a neutral third party during the closing process to prevent potential problems and protect your financial interest.

Both title and escrow companies play important roles for purchasing a new home and will be required by your mortgage broker.

Luckily, I’ll show you why you need an escrow and title company and what the difference is.

Key Takeaways:

  • A title company ensures the property title is clean. They search for title defects, unpaid taxes, and any other issue which may make the property’s title considered ‘unclean’. Some title companies also perform escrow services.
  • An escrow company is an independent third party is used to hold funds in escrow (e.g., earnest money deposit) until all conditions of a legal document have been met. Escrow will also provide necessary documents for real estate closing, pay homeowner’s insurance, and taxes.
  • You will need to utilize a title and escrow company for a real estate investment, such as purchasing your first home or rental property. It’s a good idea because they protect you from financial losses, such as buying from an untrustworthy party or liens. Mortgage lenders will also require the use of escrow and title companies.

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Title Company VS Escrow

The two most common ways to handle a real estate transaction are through a title company or an escrow company.

Despite what many people believe, these terms aren’t interchangeable. Title companies and escrow services are entirely different entities.

In short, title companies act as independent third parties throughout the transaction while facilitating the transfer of title and all relevant paperwork. Escrow companies are third parties throughout the home purchase process, but they provide a secure location to hold the funds until all contract conditions are met.

That said, confusion exists between the terms because some title agencies offer escrow services, allowing you to choose whether you want one company to handle the whole real estate transaction.

What Is a Title Company?

A title company, sometimes known as a title agency, helps ensure that the home seller holds the rights to sell the abode. It may sound simple, but title agents have their work cut out for them.

The agency reviews the property’s title, ensuring no title issues, such as outstanding liens or judgments.

Moreover, the title company will conduct a title search before the real estate process closes. A title search shows the agents whether there are any problems with the title document before issuing a title report.

On top of that, the agency provides title insurance coverage, which protects the home buyer and the mortgage lender from losses that could occur if title issues arise.

Since all mortgage providers require title reports and insurance, the seller must fix any problems for the real estate transaction to continue.

Understanding the Title Search

The title company or a real estate attorney conducts the title search by examining public records to piece together the necessary information and legal documentation, creating an “abstract” of the property’s title.

The abstract includes the following:

  • Chronology of available documents
  • All transactions related to the transference of the home
  • The current rightful owner of the property
  • Previous owners
  • Past property surveys
  • Easements
  • Wills and lawsuits involving the property

The title search can uncover any liens, judgments, or financial issues against the property or its current owner that may affect you (i.e., the seller).

The title search must display clear and free property ownership for a smooth real estate transaction. Otherwise, you might be in for a bumpy ride down the road.

However, title insurance can mitigate these risks.

The Types of Title Insurance

Like the title search, title insurance is also offered by title agencies (as the names suggest).

Two types exist — owner’s and lender’s. Both provide valuable protection for different entities involved with a real estate transaction.

Owner’s Title Insurance

Acting as a guarantee against potential mishaps, this option policy protects home buyers from:

  • Outstanding lawsuits or liens against the house
  • Conflicting ownership (e.g., will complications)
  • Fraud or forgery
  • Flawed public records
  • Undisclosed easements that could reduce the property’s value or restrict usage

Lender’s Title Insurance

Mortgage providers insist that borrowers take out lender’s title insurance.

While its basic function is the same as owner’s title insurance, it covers the mortgage lender only.

The Benefits of Using a Title Company

Title companies are essential to the home-buying process to ensure protection from issues that may occur with the house down the line.

The main benefits are as follows:

  • You’ll be 100% sure the seller has the right to transfer property ownership.
  • As long as you take out title insurance through the title company, you’ll be protected if any claims are made about ownership or usage once the property is yours.
  • You will find out about any hurdles in good time.

The above ensures you can negotiate with the property seller to request issue remediation before you close the real estate deal.

What Is an Escrow Service?

An escrow service, also known as an escrow company, holds the money associated with the home-buying process and is responsible for the legal documents related to the closing procedure.

Put simply, it’s a neutral third-party entity that assists in the sale of real estate. The escrow company holds the buyer’s deposit in a safe, secure account until both sides of the agreement fulfill their obligations and the transaction completes.

As you can see, escrow companies are very different from title agencies.

What’s Escrow?

Escrow is a legal process in which the home seller and the buyer agree to hold money (albeit temporarily) with a neutral third-party entity (i.e., the escrow company) until the agreement finalizes. In real estate, this means until the transaction happens and completes.

The legal agreement protects both sides of the agreement throughout the entire process.

But that isn’t the last you’ll see of escrow — it’s used throughout your mortgage term too.

An escrow account contains money for homeowner’s insurance and taxes for the duration of your mortgage agreement.

Understanding Escrow Accounts

Speaking of escrow accounts, there are two types to understand.

Escrow Accounts for the Home-Buying Process

Purchase agreements often include a good faith deposit (a.k.a. earnest money). It shows the seller you’re serious about buying their house. The deposit is applied to your down payment if the purchase is successful.

Escrow accounts hold this money until the transaction finalizes. But in certain circumstances, funds can be held in the account past the completion date.

Escrow companies and their agents manage these accounts. The good news is that since escrow agents work for both sides of the transaction, any associated fees are split equally between you and the seller.

Escrow Accounts for Homeowners Insurance and Taxes

Following the purchase, your mortgage lender sets up an escrow account to pay your homeowners insurance and taxes.

As you pay the mortgage, a portion of it sits in an escrow account. But you don’t need to worry about this because the lender moves it around for you.

Since this type of escrow account comes into play once the real estate transaction closes, the mortgage servicer takes care of it.

The Benefits of Using an Escrow Company

Whether you’re the buyer or seller, using an escrow company protects you from fraud and other mishaps throughout real estate transactions. That’s the biggest benefit.

For home buyers, escrow services protect deposits. Without one, you’d have to send your money directly to the seller, reducing the chances of getting the money back if the sale falls through due to a home inspection or survey problems.

For homeowners, it takes the pressure off finding lump sums to cover property taxes and insurance.

Overall, escrow companies ensure a smooth transaction for everyone involved with the property purchase process.

How Do You Choose Between a Title Company and an Escrow Service?

As you can tell, escrow services and title companies serve different functions. Although, you can find title companies that offer escrow accounts.

You need to use a title company and an escrow service when buying a home. It’s crucial for your protection throughout the process, especially since the title company conducts vital public records searches to ensure the seller has the right to transfer ownership.

It’s up to you whether you choose a title company for both services or enlist the extra help of an escrow company.

John is the founder of TightFist Finance and an expert in the field of personal finance. John has studied personal finance for over 10 years and has used his knowledge to pay down debt, grow his investment portfolio, and launch a financial based business. He is committed to sharing content related to personal finance based on his experience in his career, investing, and path towards reaching financial independence.