Title and escrow basics matter to anyone buying or selling property. These two elements protect both parties during a real estate transaction. The title proves legal ownership. Escrow holds funds and documents until all conditions are met. Without understanding these concepts, buyers risk costly mistakes and sellers face potential delays.
This guide explains what title and escrow mean, how they work together, and what costs to expect. By the end, first-time buyers and sellers will feel confident about this essential part of real estate transactions.
Key Takeaways
- Title proves legal ownership of a property, while escrow acts as a neutral third party holding funds and documents until all transaction conditions are met.
- A title search examines public records for liens, claims, or disputes that could affect ownership—always resolve issues before closing.
- Owner’s title insurance is optional but strongly recommended, as it protects buyers from hidden defects that title searches might miss.
- The title and escrow process typically takes 30 to 45 days for financed purchases and includes steps like inspections, document signing, and deed recording.
- Total title and escrow costs usually range from 1% to 3% of the purchase price, so request a loan estimate early to understand your expected fees.
What Is Title in Real Estate?
A title represents legal ownership of a property. When someone holds the title, they have the right to use, sell, or transfer that property. Think of it as proof that the property belongs to them.
Title differs from a deed. The deed is the physical document that transfers ownership from one person to another. The title is the actual ownership right itself. A buyer receives a deed at closing, which gives them the title.
Why Title Matters
A clear title means no one else has claims against the property. These claims, called liens or encumbrances, can include unpaid taxes, contractor bills, or disputes from previous owners. Buying a property with a clouded title creates serious problems. The buyer might inherit someone else’s debt or face legal challenges to their ownership.
Before closing, a title company conducts a title search. This process examines public records going back decades. The search reveals any existing claims, easements, or restrictions on the property. If issues appear, they must be resolved before the sale proceeds.
Understanding Escrow and How It Works
Escrow acts as a neutral third party during real estate transactions. An escrow company or agent holds money, documents, and instructions until both the buyer and seller meet all agreed conditions.
Here’s how escrow works in practice: The buyer deposits earnest money into an escrow account. This shows they’re serious about the purchase. The escrow holder keeps these funds safe, neither party can access them unilaterally. Once all conditions are satisfied, the escrow closes. The seller receives payment, and the buyer receives the deed.
What Escrow Protects Against
Escrow protects buyers from paying for a property they never receive. It protects sellers from transferring ownership without getting paid. Both parties benefit from this arrangement.
The escrow officer follows specific instructions from the purchase agreement. They verify that inspections are complete, loans are approved, and all documents are properly signed. Nothing happens until everything checks out.
Some states require attorneys to handle escrow. Others allow title companies or independent escrow agents. The process stays the same regardless of who manages it.
The Role of Title Insurance
Title insurance protects against problems that title searches might miss. Even thorough searches can overlook forged signatures, clerical errors, or unknown heirs with valid claims. Title insurance covers these hidden risks.
Two types of title insurance exist:
- Lender’s title insurance: Protects the mortgage company. Most lenders require this policy.
- Owner’s title insurance: Protects the buyer. This is optional but strongly recommended.
Lender’s policies only cover the loan amount. If a title defect surfaces years later, the lender recovers their investment, but the buyer loses their equity. Owner’s title insurance covers the full purchase price and pays for legal defense if someone challenges the title.
How Title Insurance Differs From Other Insurance
Unlike car or health insurance, title insurance involves a one-time premium paid at closing. There are no monthly payments. The policy remains valid for as long as the owner or their heirs hold an interest in the property.
Title insurance looks backward, not forward. It covers issues that existed before the policy date but weren’t discovered. Standard policies don’t cover problems that arise after purchase, such as new liens from the buyer’s actions.
Key Steps in the Title and Escrow Process
The title and escrow process follows a predictable sequence. Understanding each step helps buyers and sellers know what to expect.
- Opening escrow: After the buyer and seller sign a purchase agreement, escrow opens. The buyer deposits earnest money.
- Title search begins: The title company examines public records for liens, judgments, and ownership history.
- Preliminary title report: The title company issues a report showing the current owner, existing liens, and any concerns. Both parties review this document.
- Resolving title issues: If problems appear, the seller typically resolves them. This might mean paying off old debts or obtaining releases from previous lienholders.
- Inspections and contingencies: During escrow, the buyer completes property inspections. Loan approval also happens during this phase.
- Signing documents: Near closing, both parties sign final paperwork. The buyer signs loan documents: the seller signs the deed.
- Funding and recording: The lender sends funds to escrow. Once funds clear, the escrow officer records the deed with the county.
- Closing escrow: The title transfers to the buyer. The seller receives their proceeds. Keys change hands.
This title and escrow process typically takes 30 to 45 days for financed purchases. Cash deals can close faster.
Common Title and Escrow Costs to Expect
Title and escrow services come with fees. Buyers and sellers should budget for these costs, which vary by location and property value.
Title-Related Costs
- Title search fee: Ranges from $75 to $200. Covers the cost of examining public records.
- Title insurance (lender’s policy): Usually 0.5% to 1% of the loan amount.
- Title insurance (owner’s policy): Typically 0.5% to 1% of the purchase price. Some areas offer discounts when buying both policies together.
Escrow-Related Costs
- Escrow fee: Often split between buyer and seller. Ranges from $500 to $2,000 depending on the transaction size.
- Document preparation: Fees for drafting deeds and other legal documents. Expect $50 to $150.
- Notary fees: Small charges for notarizing signatures, usually under $50.
- Recording fees: Government charges to record the deed and mortgage. Typically $50 to $250.
Who Pays What?
Customs vary by state and region. In some areas, sellers pay for owner’s title insurance. In others, buyers cover it. The purchase agreement specifies who pays which costs. Everything is negotiable.
Total title and escrow costs often run between 1% and 3% of the purchase price. First-time buyers should request a loan estimate early. This document breaks down expected costs.
