Most People Don’t Understand the Closing Documents They Sign

November 4, 2021
8:00 am

Title insurance companies play a major role in successfully closing a real estate sale. They provide insurance that is vital to the buyer and lender. But in many states, the title company also helps make the closing happen by performing several other functions. Here’s a guide to what title companies do.

Title insurance

When a homeowner closes the sale of her house to a buyer, “title” — that is, ownership —transfers to the new owner. Unfortunately, sometimes events have happened that “encumber” the homeowner’s title to the property. When this happens, the original homeowner cannot pass clear title to a new buyer and a sale cannot go forward. Encumbrances include such things as government-imposed liens for the payment of back taxes, mechanic’s liens from a contractor who previously worked on the property and was never fully paid, or easements that have been granted to allow other parties to enter the property.

To avoid having encumbrances prevent a property sale from going forward, title companies search official records for liens, easements and other encroachments so that these issues can be taken care of and the sale can close. Once the title company has done all it can to determine that title to a property is clear (sometimes encumbrances are not recorded and can’t be found before closing), it issues a title insurance policy for an added measure of security. This coverage protects both the buyer and the mortgage lender against any defects in the title that were not found prior to closing. That feature makes title insurance different from other forms of insurance: most insurance types protect against future negative events, while title policy generally protects against past unknown defects.

Title insurance protects new owners from spending substantial sums on properties that turn out to have legal entanglements. Title insurance also protects mortgage lenders’ financial interest in the property.

Additional title company responsibilities
  • In some states, the title company holds the buyer’s earnest money or down payment until those funds are applied at closing (or returned to the buyer under certain provisions of sales contracts). In other states, an attorney performs these functions.
  • The title company disperses money at the closing.
  • Typically, a closing officer working for the title company brings all documents to the closing, explains them to the buyer and seller and makes sure all necessary signatures and notaries are obtained.

Explaining closing documents to the buyer and seller is increasingly important in a competitive market where buyers may be acting more quickly than in the past. A June 2021 survey by Qualia, a cloud-based digital closing software company, found that only one in five buyers understood the documents they were signing at closing. A quarter said they had no idea what the closing process entailed.  

In an article published by Real Trends, Qualia’s CEO Nate Baker said, “This survey emphasizes the need for increased education and transparency during the home buying and selling process. Our core belief is that technology that powers the transaction is the key to providing that assurance. It can simplify a very complex process to allow real estate professionals to focus on client education and a seamless home buying experience.”

Statistics like those show the need for title companies to provide personal assistance to homebuyers. Technology has helped streamline the closing process, but the Qualia study indicates that 55 percent of homebuyers still want face-to-face contact and personal interaction with real estate professionals before going to closing. Title companies can provide the parties information about who is responsible for what costs, what the various closing documents mean and what will happen at closing. These services provide both buyers and sellers with the knowledge to make closing a more straightforward process for everyone involved.

“The Qualia findings confirm that the real estate industry is about customer service at its core,” adds Paul Yurashevich, President, Verus Title Inc. “Technology can help streamline the process but does not substitute for expertise and customer-centricity. We are there every step of the closing process to guide the buyer, seller and all parties to the transaction on what to expect. At closing, having a title expert at the table will build comfort and make the last piece of the home buying experience a success.”