So you have picked out a Real Estate agent. They helped you either sell your house or showed you a bunch of places. Now you are under contract. Suddenly there are all these other people involved like the Title Company vs Escrow. Don’t worry. It’s all part of the process. We are here to help explain all the different terms and people involved.
A Title Company is an office that acts as an independent 3rd party in the transaction. Title Company vs Escrow. What’s the Difference? facilitate the transfer of title. Also, all the paperwork and recording of documents that need to happen when a property is sold. Escrow is where a 3rd party holds money or funds until all conditions of a contract are met. Sometimes they are the same company, sometimes they are different.
Each of the 50 states has different requirements on who can transfer the title of a property. I’ve prepared a giant list of closing companies in all 50 states, so be sure to check out that list.
Escrow in Real Estate
Obviously, there is a lot of money at play when a property changes hands. It is essential that a neutral 3rd party handles all the finances, and makes sure that everything goes where it should.
This is the job of an Escrow agent. Sometimes they are also the title agent, but they can also be a separate company that provides escrow services. When one person handles both jobs I like to call them the settlement agent, but that’s just me.
Because this is one of the largest financial transaction you might ever do, it is important to have an independent third party handling the money. That is an Escrow company.
Are you still wondering about title company vs escrow? Read on!
How the Money is Handled
Let’s talk about how the escrow process is taken care of during a real estate process. Of course, there are two sides – let us say that this is a regular financed deal, where both the seller has a mortgage they will pay off with the proceeds and the new owner will get a mortgage loan to buy the house.
Starting with the buyer’s part of a transaction. Once a contract for a home purchase is offered and accepted, the buyer will have a few days to deliver earnest money and any other funds required by the contract to an escrow company.
On the purchase agreement (the contract), in addition to all the necessary information like closing date, down payment, and sales price, a title company and an escrow company are specified. This is where the earnest money is delivered following the strict timeframes entered into the contract.
What about the Inspection?
As a side note, any home inspection is usually handled directly between the new buyer and the home inspector. Whoever pays for the inspection “owns” it and can keep it private or share the info as they want.
The funds can be delivered any number of ways, but usually, a bank or wire transfer is most common. It can be by certified or even personal check, or other means too.
These escrow funds are held in a special non-interest-bearing account and will be credited back to the buyer at closing. Or if the buyer backs out and the contract dictates, the funds will go to the seller. All parties will be notified of what happens, and it is completely dictated by the contract.
Who Pays for What?
If a real estate attorney, a new survey, or an appraisal is done, they have to be paid for. This again is the job of the escrow agent. Either the buyer or seller will pay the escrow agent. According to the contract, of course) who then pays the appropriate party, and it gets recorded and shared.
When it comes time for the closing process, a special closing disclosure is generated accounting for all the different fees and funds. Currently, this is called the TRID, but there have been many different names.
Pro-Rating closing costs
This will have all the different funds pro-rated to the closing date, and may include:
- HOA Fees
- Property Taxes
- Legal Fees,
- Title Insurance Policies
- Lender’s Title Insurance
The seller’s mortgage company will be contacted and a payoff amount for the old loan will be calculated to the exact day of closing. The proceeds from the sale of the house will be used for this first. Typically the loan documents specify that the mortgage is in the first lien position, so it gets paid before the homeowners see any of the purchase price. If the price of the home is less than the balance, they are underwater and unfortunately at a financial loss
The buyers will get a copy of the final closing disclosure which will have the total amount of money they need to bring to the closing. It will list all the monies they have paid for the appraisal, earnest, option, and whatever else, and show it as a credit.
Talk about title insurance. Title insurance is an entire article, but basically there are two types of title insurance. One is for the owners of the home, and the other is called a lender’s title policy and is for the lender. These are important documents that prevent any previous owner from coming back and claiming that the home is still theirs. It ensures the rightful owner of the property is the only owner, and that the property’s title is free and clear to the new owners. In each of these cases, it is a one-time fee that is paid at closing, and is actually negotiable between the buyer and the seller.
What does a Title Company do?
The title industry is a closely regulated group because of the importance of their job. Here are just some of the tasks title companies perform in a real estate transaction:
- Title Research And Property Survey
- Researches the Chain of Title
- Verify who actually owns the property (title search)
- Looks for title defects
- Shares the title report with the new buyers
- Checks for liens and judgments against the house.
- Check for unpaid HOA dues
- Looks for other restrictions (55+ community for example)
- Identifies Easements and shares with future buyers
- Verifies the Taxes are current
- Provides Title Insurance
As you can see, a Title company handles a lot of the heavy lifting in the process. The actual escrow agent oversees the process and typically has escrow assistants working in tandem to make sure everything gets taken care of.
Often times they are working on several different files at a time, and to keep everything organized they use GF numbers to prevent any mix-ups.
In addition to all these services, they also can act as an escrow agent gathering the different funds from the buyers and disbursing to the seller and other agencies as needed.
Alternatively, it is possible to use a separate escrow company, but that is becoming more rare as title companies handle it all.
Now you should have a better understanding of Title company vs Escrow. A Title company handles the transfer of a property, while escrow is how the money is handled.
I like to always end with a pro tip so – if you are looking for a good title company, find one that you connect with and is fast to answer the phone or respond via email. Communication is key! A ask your real estate agent if they have any preferred Escrow companies. They should always be able to provide a list of 3 or more.