Title and escrow basics form the foundation of every successful real estate transaction. Buyers and sellers often focus on price negotiations and property inspections, but overlook two critical components that protect their investment. Title services verify ownership rights, while escrow accounts safeguard funds until all deal conditions are met. Understanding these processes helps buyers avoid costly mistakes and sellers close deals with confidence. This guide breaks down what title and escrow services do, how they work together, and practical strategies for protecting interests throughout the transaction.
Key Takeaways
- Title and escrow basics are essential for protecting both buyers and sellers throughout every real estate transaction.
- Title services verify property ownership and identify liens or claims, while escrow accounts hold funds until all deal conditions are met.
- Always purchase an owner’s title insurance policy to protect against future ownership disputes, forgery, or unknown heirs.
- Review your title commitment carefully and resolve any defects before closing—unresolved liens transfer to the new owner.
- Protect yourself from wire fraud by verifying escrow wiring instructions through official phone numbers, never through email links.
- Track all escrow deadlines and complete your final walkthrough to avoid forfeiting earnest money or missing critical issues.
What Are Title and Escrow Services?
Title services and escrow services serve distinct but related functions in real estate transactions. Both protect buyers, sellers, and lenders from financial loss.
Title Services Explained
Title services confirm that a property’s ownership is legitimate and transferable. A title company conducts a title search, which examines public records to trace the property’s ownership history. This search identifies any liens, judgments, easements, or other claims against the property.
Once the search is complete, the title company issues a title commitment. This document lists any issues that must be resolved before closing. After closing, buyers typically receive a title insurance policy that protects against future claims or defects that weren’t discovered during the search.
Escrow Services Explained
Escrow services act as a neutral third party that holds funds and documents during a transaction. The escrow agent follows written instructions from both parties and releases funds only when all conditions are satisfied.
Think of escrow as a trust account with rules. The buyer deposits earnest money into escrow to demonstrate serious intent. The escrow company holds these funds until closing conditions are met, inspections pass, financing is approved, and title issues are resolved. This arrangement protects buyers from losing money if the deal falls through for legitimate reasons.
How the Escrow Process Works
The escrow process follows a predictable sequence from opening to closing. Understanding title and escrow basics at each stage helps all parties anticipate what comes next.
Opening Escrow
Escrow opens once buyer and seller sign the purchase agreement. The buyer submits earnest money, usually 1% to 3% of the purchase price, to the escrow company. The escrow officer creates a file and begins collecting required documents.
The Middle Phase
During this phase, several activities happen simultaneously:
- The title company performs its title search
- The buyer schedules inspections and appraisals
- The lender processes the mortgage application
- Both parties work through any contingencies
The escrow officer coordinates with all parties and tracks deadlines. If issues arise, say, a lien surfaces during the title search, the escrow officer communicates this to everyone involved.
Closing Escrow
Closing happens when all conditions are met. The buyer signs loan documents and provides remaining funds. The seller signs the deed. The escrow company calculates final costs, disburses funds, and records the deed with the county.
Title and escrow basics dictate that funds don’t change hands until recording is confirmed. This final step transfers legal ownership to the buyer.
Key Strategies for Protecting Your Title
Smart buyers and sellers take proactive steps to protect their interests. These title and escrow basics strategies minimize risk and prevent closing delays.
Purchase Title Insurance
Title insurance is a one-time premium that protects against ownership disputes for as long as you own the property. Lenders require a policy that protects their interest. Buyers should also purchase an owner’s policy.
Why does this matter? A previous owner might have forged a signature on a deed. An unknown heir could surface claiming ownership rights. Title insurance covers legal fees and potential losses from these situations.
Review the Title Commitment Carefully
Don’t just glance at the title commitment, read it. This document lists exceptions to coverage and requirements that must be met before closing. Common items include:
- Paying off existing mortgages
- Clearing tax liens
- Obtaining releases from judgment creditors
Ask questions about anything unclear. Request explanations for unusual exceptions.
Choose Reputable Providers
Title and escrow services vary in quality. Select companies with strong local reputations and clear communication practices. Check reviews, ask for referrals from real estate agents, and verify licensing with state regulatory agencies.
Keep Records After Closing
Store your title insurance policy, deed, and closing documents in a safe location. You may need these years later when selling, refinancing, or resolving boundary disputes.
Common Title and Escrow Pitfalls to Avoid
Even straightforward transactions can hit snags. Awareness of common pitfalls helps buyers and sellers stay on track.
Missing Deadlines
Escrow timelines include specific deadlines for inspections, loan approval, and contingency removals. Missing these dates can void the contract or forfeit earnest money. Use a calendar to track every deadline from day one.
Ignoring Title Defects
Some buyers feel pressure to close quickly and overlook minor title issues. This is a mistake. Unresolved liens follow the property, not the previous owner. A $2,000 mechanic’s lien today becomes your problem tomorrow.
Wiring Fraud
Escrow wire fraud has increased dramatically in recent years. Criminals hack email accounts and send fake wiring instructions that redirect funds to fraudulent accounts. Always verify wiring instructions by calling the escrow company directly using a phone number from their official website, not from an email.
Insufficient Funds at Closing
Buyers must bring certified funds or wire money for closing costs and down payment. Personal checks typically aren’t accepted for large amounts. Confirm the exact amount needed several days before closing and arrange funds accordingly.
Skipping the Final Walkthrough
The final walkthrough happens shortly before closing. Buyers verify the property’s condition matches expectations and that sellers completed agreed-upon repairs. Skipping this step removes leverage to address last-minute issues.
