Title and settlement services: A step-by-step walkthrough

If you have already received your Loan Estimate, you may also notice a cost for “title fees.” These fees cover the costs for the title insurance and settlement fees that relate to title due diligence work, preparing settlement documents, and issuing title insurance. In short, the title company’s role is to take care of all the behind-the-scenes work that needs to happen before you can close on a home purchase or refinance.
Here's a rundown of title and settlement services, how these services get you to closing, and what to expect from the process:

What is title?

“Title” refers to the legal ownership rights to a home. Before a home purchase or refinance transaction can close, the property must have a “clear” title, meaning no one has a claim to it in the form of outstanding liens or debts. Your title company is responsible for finding anything that can hinder a clear title, and, if anything is discovered, they will take corrective action to enable the transaction to go through, which allows you to have title insurance, to continue on in the loan process, and will provide you peace of mind about your investment.

What does the title company do?

A title company handles the review of any title claims and prepares for the closing. They also typically manage the escrow account, which holds funds that must be set aside for the home purchase or refinance until certain conditions are met or the transaction is complete and the funds are disbursed to the necessary parties. For example, if you’re buying a home and you’ve made an earnest money deposit, these funds will usually be held in the title company’s escrow account.

While the title company may not seem as present during a loan transaction as your real estate agent or lender, they are an equally important part of the team. The work they are conducting behind the scenes is crucial to make sure you get to the closing table.

Here are the steps title companies take during a mortgage transaction to get you to closing.

1. Title search and examination

One of the first steps in the title process involves a bit of detective work. Your title company will do some research to learn about the history of the property. This is commonly referred to as a title search. For all transactions, this search will show the home’s past ownership details and uncover any red flags that could halt the home sale or refinance.

For home purchase transactions, the title search will also identify all owners who have interest in the transfer of the property and who will be required to execute vesting documents at the time of closing.

The title company will also look for and examine liens or judgments against the property for bankruptcy cases, divorce agreements, outstanding mortgages, overdue property taxes, and other debts. These outstanding balances must be paid before the transfer of ownership.

A title search may also reveal property restrictions or limitations. Some details that might arise are:

• Boundary issues, if the home or other structures were built outside of property lines
• Easements that could give other parties, such as utility companies, government agencies, or businesses access to your land
• Restrictions or historical status that could mean certain rules must be followed on how you can change or modify the home

The purpose of these exams is to protect you and the lender from being on the hook for any unresolved title issues—for example, mistakes in public records, erroneous surveys, or property or building code violations. It’s important to discover these issues before closing, so that you don’t inherit these problems.

If any snags arise during a title examination, not all will necessarily prevent you from closing. The property title must simply be clear before you can buy the home or refinance your mortgage. If there are any holdups that could prevent you from closing, your processing expert will communicate those to you as soon as they are identified.

2. Fix any errors and resolve title issues

If the title company finds any issues, they can start working to resolve them immediately to keep your closing on schedule. They may chat with the seller to learn more about ownership disputes, and they may ask for paperwork to prove someone else doesn’t own the home. For example, if the problem involves an unpaid roofing bill, the title company may need to resolve it with the current owner and contractor.

3. Issue title insurance

After a title company is confident that a property is free of title defects, they have the green light to move forward and issue title insurance policies. This protects both homebuyers and lenders against claims for things that happened in the past, such as previous owner liens or ownership issues.

While a lender’s title insurance policy is required in every purchase or refinance mortgage transaction, an owners’ policy is separate and optional. With that said, buyer protection is recommended to ensure that you, as the new homeowner, are protected from any potential legal issues that may arise from the past. If you do choose to purchase an owner’s policy, it will remain active in the event you refinance your mortgage at a later date.

4. Settlement and signing

With a clear title and title insurance policy—and after all other items required by the lender are complete—the title company can schedule a closing date, which is also known as the settlement date. Your title company and lender will work together to prepare the closing paperwork.

On settlement day, you should be prepared to sign your closing package documents, which include purchase or refinance mortgage paperwork. For a home purchase, it will also include the transfer of ownership agreement for the property.

You may also need to write a check or wire money for closing costs and mortgage escrow for homeowners insurance and property taxes. After signing and notarizing all the necessary paperwork, the documents will be sent back to the title company to review, before being sent to the lender. Once all of the paperwork is approved, the lender will send the money to the title company, who will then disburse the funds.

5. Mortgage recording and funding

If everything on your closing day goes according to plan, the title company will submit your mortgage for recording at the county records office. Then, local officials will make note of the details for public record. At this point, the title company will disburse funds for the new mortgage loan, and taxes and homeowners insurance (if applicable). If you’re refinancing, the title company will pay off your previous mortgage and, for a cash-out mortgage refinance, send you funds.

Title and settlement services are essential

While the title and settlement process may seem less exciting than, say, picking out custom kitchen finishes or new hardwood floors, it's a critical step in the homebuying and mortgage process. Most of the title services work will happen behind the scenes, but you can relax once your lender approves your mortgage and you know the home is rightfully yours.

Better Mortgage has an affiliated title company to make the whole process a lot easier. Start your mortgage journey with us and experience it yourself today.