Last Updated April 4, 2022
If you’re in the market for a new home, you may be wondering about the difference between an escrow company vs title company. Both of these organizations play an important role in the home-buying process, but they serve different functions. In this blog post, we will explain the key differences between escrow companies and title companies so that you can make an informed decision about which one is right for you.
What Is An Escrow Company And What Does It Do?
An escrow company is a third-party organization that helps in the sale of a home. When you work with an escrow company, they will hold onto the buyer’s deposit and other documents (such as the deed and other documents related to the sale of the home) until the transaction is complete.
This helps to ensure that both the buyer and seller are protected during the sale process.
What Is Escrow?
When buying a home, you probably heard the term “escrow” being used at some point. But what is escrow?
Escrow is a process where two parties (the buyer and the seller) agree to hold funds temporarily with a neutral third party (such as an escrow company) until an agreement has been finalized—like completing the home buying process. So escrow protects the buyer and the seller when buying/selling a home.
Escrow is also used when you have a mortgage. When you have a mortgage, an escrow account will hold money for taxes and homeowner’s insurance.
Some lenders often include property taxes into the borrower’s monthly mortgage bill. When you pay your property taxes along with your mortgage payment, your lender deposits your property tax payment into an escrow account.
Once your property taxes are due, your lender will use the funds in that escrow account to pay the taxes on your behalf. When your taxes are paid, both you and your lender should receive a notice from your local tax authority. If you don’t, it’s best to contact your lender and your tax authority to make sure your property taxes are being paid on time.
Homeowners insurance is typically required when you take out a mortgage. Therefore your lender may require you to pay for your home insurance through an escrow account.
What Is An Escrow Account?
In real estate, an escrow account is a bank account that’s used for two reasons:
- When you’re buying a home, an escrow account is set up to hold the deposit from the buyer.
- For a homeowner who has a mortgage, an escrow account is where the lender deposits your monthly payments for taxes and homeowners insurance.
So in other words, an escrow account is used during the home buying process until the deal is complete, and you may have another escrow account (opened by your lender) used through the life of your loan if you take out a mortgage.
Escrow Accounts During The Home Buying Process
When buying a home, you usually have to put down a good faith deposit (also known as earnest money) when you sign a purchase agreement. This deposit shows the buyer you’re serious about purchasing the home.
To protect both the home buyer and the seller, an escrow account will be set up to hold your good faith deposit until the deal is complete.
If the deal falls through at no fault of the buyer, your money is returned to you. If the deal fails because the buyer did not follow through with the agreement, the seller will get to keep the deposit.
Escrow Accounts For Homeowners
After your home purchase, as the new owners, your lender will set up an escrow account to pay for your property taxes and insurance when they are due. This can be helpful because it ensures that you don’t miss any payments and that your taxes and insurance are always paid on time.
What Happens To The Escrow Account When The Transaction Is Complete?
When you’re buying a house and the transaction is complete, as a buyer, your good faith deposit will be applied to your down payment. After you close on your house, the escrow account set up for your deposit will be closed.
If you’re a homeowner (seller) with a mortgage, your escrow account that was opened by your lender will be closed.
Who Is the Person Who Coordinates the Escrow Process?
The person who coordinates the escrow process is the escrow agent (a representative from an independent third party called an escrow company)—in some areas they may be called a settlement agent. The escrow agent is responsible for collecting all the necessary documents and information from the buyer and the seller and then coordinating the transaction.
The escrow agent is also responsible for ensuring that the transaction is completed in a timely manner.
In some areas (for example, in New York City where I live) the seller’s real estate attorney may handle this process. So if you’re not sure, it’s a good idea to ask your real estate agent who will be handling your deposit money and any closing documents.
What Are The Benefits Of Using An Escrow Company?
The biggest benefit of using an escrow company is that you will be protected from fraud during a real estate transaction—whether you’re the buyer or the seller.
It protects you as the buyer because you know that the escrow company will not release the escrow funds to the seller until you have received the property. For example, if the sale falls through due to no fault of your own, but you gave your good faith deposit directly to the seller, it’s possible that the seller won’t return your deposit. But since an escrow company is a neutral third party that’s holding your deposit, you can feel safe knowing your deposit will be returned to you.
It protects you as the seller because you know that the escrow company will not release important documents to the buyer until the buyer has fulfilled their obligation under the terms of the contract and all the funds have been received.
This protection is important because it gives both buyers and sellers peace of mind during what can be a very stressful time.
An escrow company will help to ensure a smooth transaction. Therefore, the escrow agent will coordinate the entire process and make sure that everything is done in a timely manner.
Finally, an escrow company can also protect you once you become a homeowner because your escrow company will make sure your property taxes and homeowners insurance are always paid on time.
What Is A Title Company And What Does It Do?
A title company is a company that helps to ensure that the seller of a home actually has the right to sell the property. They do this by reviewing the title of the property and making sure there are no outstanding liens or other title issues.
Before the real estate closing, the title company will conduct a title search of public records related to the property to look for any problems with the title and then issue a title report. A title company will also issue a title insurance policy, which protects the buyer and lender from any losses that may occur if there are problems with the title.
Title reports and title insurance are required by mortgage lenders. Therefore, if there is anything wrong with the title, the seller will need to fix it so the sale can proceed.
What Are The Types Of Title Insurance?
There are two basic kinds of title insurance: a lender’s policy and an owner’s policy.
Lender’s title insurance (often called a lender’s policy) protects a lender for as long as they have an interest in the property—and this is usually until your mortgage is paid off. So the lender’s title insurance coverage lasts until the mortgage is paid in full.
The owner’s title insurance policy protects an owner from defects in their ownership interest including any third-party future claims that might arise after ownership is transferred. An owner’s policy remains in force as long as you or your heirs have an interest in the property.
So, if challenges to title arise after the property has passed to your heirs, the title insurance company would defend the title for them just as it would for you.
What Is A Title Search?
A title search is a detailed examination of all available public records on a property to verify the seller’s right to transfer ownership and to discover any potential challenges in the closing and ownership process.
For example, a title search may reveal unpaid taxes, unsatisfied mortgages, judgments against the seller, and restrictions limiting the use of the land. These are all important things to know as a buyer because they need to be addressed before you can close on the property.
If you miss these issues, as a buyer, you may not be able to close on the property or may have to pay for them yourself when it comes time for you to sell the property. So you definitely want to know the history of the property before you buy it.
What Are The Benefits Of Using A Title Company?
When you’re looking to buy property, it is important to use a title company to protect yourself from any potential problems you may have with the property in the future.
Some benefits of using a title company are:
- They conduct a detailed examination of all available public records to verify the seller’s right to transfer ownership.
- They can discover any potential challenges before the closing process.
- They protect you (with title insuarance) if there are any types of legal claims made regarding ownership rights of the property.
When you know about potential problems with a property in advance, you can make an informed decision about whether or not to buy the property. You can also negotiate with the seller to have them fix any problems before you close on the property.
Escrow Company vs. Title Company: How To Choose Between The Two?
While escrow companies and title companies both play important roles in the real estate process, they do serve different functions. Escrow companies and title companies are NOT the same. However, there are title companies that can offer escrow services.
When you are buying a property you need BOTH an escrow company and a title company. This is super important to protect you during the home buying process and you should include this expense as part of the closing costs.
A title company protects you because they make sure the seller actually has the right to sell the property. If you buy a property that was never lawfully owned by the seller, you could have a lot of problems down the road when the rightful owner makes claims of ownership of the property or you try to sell the property.
A title company also protects you with title insurance if there are any legal claims made on ownership of the property. Title insurance can be obtained through a title agent.
So bottom line, you NEVER want to buy a property without using a title company and doing a title search first.
On the other hand, an escrow company protects you during the home buying process by holding on to important documents and money until everything is ready to be transferred at the closing table. They also coordinate all of the different steps involved in buying a property so that everything runs smoothly.
They also protect you once you become a homeowner by making sure your property taxes and homeowners insurance are always paid on time.
Now that you know the significance of using an escrow firm and a title agency, you should definitely hire a good real estate attorney to help you navigate through this process as well. Please reach out to me if you have any questions or need help finding a good real estate attorney in New York (where I’m licensed to practice law). I would be happy to help!
So, what is the difference between an escrow company vs title company? An escrow company holds money or documents on behalf of two other parties in a transaction. While a title company conducts a property search to make sure that the person selling the property actually has the right to sell it. When you are buying or selling a home, it is important to understand the role of each party involved in order to ensure a smooth transaction.
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