What is Title and Escrow
When you buy or refinance your house, you will more than likely use the services of an escrow and title company. Most borrowers, home buyers and sellers only have a vague understanding of the function of these services. Interestingly enough, they play a KEY role in your purchase and your continued ownership of the home you are buying or refinancing.
Let’s review what each of these does, and give you some critical information you need to know to be prepared to deal with them. I say critical information, not to exaggerate but to really drive a point home of how important some of these items are. They can literally by life-changing decisions you make here.. More on that in a moment. Let’s dive in.
The Escrow Company
We will start with the escrow company because it is the first of the two to get involved in your closing. You probably read and agreed along the process of writing your purchase agreement, to use a particular title and escrow company that is typically chosen by the listing agent who represents the seller. You also were notified by your agent that once the purchase contract was accepted and signed by the seller and you, that now “escrow needs to be opened”. This is second stage of your home buying process, after securing an accepted offer on a house of your choice.
What the escrow company does
Let’s first give you a practical definition of “escrow”. An escrow company is an independent third party that takes instructions from seller and buyer, and holds funds that are to be distributed to the agreed-upon parties, once the terms of the escrow agreement are fulfilled. The escrow company also holds the deed from the seller, conveying title to the buyer, and will facilitate the recording of the deed once the buyer has complied with the requirements of the contract.
The purchase agreement you and the seller signed is now titled “purchase agreement and escrow instructions”. They were once separate but similar documents, up until the lawsuits began and the industry decided to simplify the process to avoid discrepancies between the purchase agreement and the escrow instructions. They are now one and the same.
Within that document, there are many agreements and promises made by both parties in order for the title to the property to be delivered to the home buyer. There are also timelines by which these have to occur, and stipulations as to remedy and consequences if they are not performed. Again, this is what buyer and seller agreed on while negotiating that contract to sell/purchase. Now the escrow company is tasked with making sure they are given evidence that the agreements have been fulfilled so they can transfer title.
Important to know about escrow companies
They are a neutral and impartial service that only carries out instructions given by the seller and buyer. No agent or lender, or anyone other than the seller or buyer can tell the escrow company to do anything different than what you agreed upon.
Any changes in the agreement have to be bilateral. Sellers can’t instruct the escrow agent to change anything unless the buyer also agrees, and vice versa. Unilateral instructions are not acceptable.
The escrow company will NOT give you ANY advice on any part of the contract. They do not interpret contracts/laws/rules. They ONLY take instructions and receive documents related to the fulfillment of the contract. For those that sell by owner, or buyers who buy from the owner directly; the escrow company or title company WILL NOT help you draft a contract. That is against their duties and a violation of the bond contract they maintain as part of regulatory compliance.
What you need to do for escrow as a home buyer
The first thing you will have to do is deposit your Earnest Money Deposit into the escrow account. BEWARE! Make sure you follow the instructions from your escrow company to send the funds. Make sure you actually speak to them on the phone to get instructions. Even with the widely known schemes out there, we would think people are extra careful sending large sums of money to anyone, and yet.. Every day across America someone loses tens, sometimes, hundreds of thousands of dollars to scams. These have nothing to do with escrow companies, but rather the scammers who may intercept email communications between you and the escrow company, and change routing numbers, account numbers etc. to divert funds to the scammers’ account. It happens, be careful when sending money.
Secondly, you will receive a package of documents in the mail/email from them where you have to complete some forms. Important information about these forms, in particular, two of them:
Statement of information
This form will ask you for everything the title company needs to have in order to verify your identity. It has VERY personal identifying information of sensitive nature. Be sure you handle this properly to avoid becoming a victim of identity theft.
Vesting worksheet
Escrow needs to know how you are going to take title to the property you are buying. This is one of those super-important matters to consider carefully before you decide. The “not so funny” thing is, nobody is really qualified to give you direction on this, and legally everyone in the transaction needs to keep far away from giving you advice on this. Your best bet is to consult an attorney, specifically a Real Estate attorney or Estate attorney.
There are other forms such as insurance agent information and so forth. Make sure you fill these out and return them to escrow ASAP. Unfortunately, it is not common for sellers or buyers to hold off on these and disaster happens when title gets your Statement of Information, runs what they call “general index” as you are getting ready to close, literally within 24 hours of everything being finalized, only to find out there is a problem. Sometimes it is a matter of wrong identity, which may end up getting cleared up.. days after it is found. Your lock may expire by then, so many things can go wrong when there are delays. It is best to be proactive and get escrow what they need upfront.
The Title Company
Title companies insure the interest of the buyer in the house being purchased, is transferred to them without liens and encumbrances which would prevent the buyer from acquiring “ clear and equitable title”. At the same time, they insure the lender that they will be in first priority position in the order of liens, protecting the large investment they are making via the loan they are issuing so the buyer can buy the property.
Title companies often also act as escrow companies. In many cases, this is a practical pairing, especially in refinance transactions. It is rare that a purchase transaction will involve a title company handling title and escrow.
Types of title policies
There are generally two types of policies that title insurers offer on home purchases:
Owners Policy
This policy protects the owner against defects of title for as long as they own the property. This policy is usually requested of the current owner for the new buyer. The seller is essentially purchasing the policy for the benefit of the buyer, giving them peace of mind that the home is free and clear of defects of title.
Lender Policy
These policies are issued when the property is purchased or refinanced. This insures that the lender issuing a mortgage on that house is in 1st lien priority in the event they have to repossess the property due to default on the loan.
What you need to do for the title company.
It is rare that the buyer or seller will have direct contact with the title company. All requirements by the title company are handled through the escrow company. The “Statement of Information” mentioned previously is an important document you should complete as soon as possible to avoid any surprises at the closing.
Hopefully, this has given you a better understanding of what these two companies do to facilitate the sale and purchase of Real Estate. If you have any questions that need clarification, do feel free to contact me and I’d be happy to put you in touch with the appropriate people to give you further guidance on the matter.
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