Glossary of Title and Closing Terms Every Homebuyer and Seller Should Know

Understanding Your Property

Property ownership involves several key legal concepts that determine how real estate is held, transferred, and documented.

Title

In real estate, title refers to a legal status, not a physical document. It represents the legal right to own, use, and sell property. Having title to a property means being entitled to all rights associated with owning that property, including the rights of possession, control, exclusion, enjoyment, and disposition.

The title is transferred from one owner to another at closing through a deed. The title company ensures that buyers receive a clear title, meaning there are no legal disputes, unpaid debts, or other issues that could challenge ownership rights.

Deed

A deed is a legal, written document that transfers title from one owner to another. In real estate transactions, there are three main types of deeds: general warranty deeds, special warranty deeds, and quit claim deeds. 

Every deed must include the names of the grantor (seller) and grantee (buyer), a legal description of the property, and the grantor's signature. It should also state what type of deed it is and any conditions of the transfer. At closing, the seller signs a deed that legally transfers property ownership to the buyer. This deed must be properly executed and recorded with the county clerk to make this transfer official. 

Abstract

An abstract is a comprehensive summary that traces the historical record of a property, sometimes going back 30 to 60 years or more. It includes all recorded documents that have affected the property over time, such as previous deeds, mortgages that have been paid off, satisfied liens, easements that have been granted, and any legal proceedings involving the property.

The title company uses the abstract as the foundation for conducting the title search and preparing the title commitment. Reviewing this historical record allows the title company to identify any potential issues that might affect ownership and ensure that all previous claims against the property have been properly resolved.

Title Insurance

Title insurance protects property owners from hidden risks that could threaten their ownership rights. The process of issuing title insurance involves thorough research and examination to identify and resolve potential issues before they become costly problems.

Title Search and Exam

A title search and examination is a comprehensive review of public records to establish the ownership history of a property and identify any issues that could affect ownership rights. This process occurs before every real estate transaction.

During the title search, the title company examines public records going back at least 30 years, reviewing deeds, mortgages, court records, tax records, and other documents to trace the chain of ownership and identify any liens, judgments, easements, or other encumbrances that affect the property.

The purpose of the title search is to:

• Review records to establish a complete ownership history
• Identify any breaks in the chain of title or encumbrances that can threaten ownership rights
• Allow the title company to resolve issues and ensure the buyer receives a clear title at closing

Common problems discovered include unpaid taxes, contractor liens, boundary disputes, or errors in previous deeds.

Title Insurance

Title insurance protects against financial loss from title problems that may not have been discovered during the title search. Unlike other insurance that protects against future events, title insurance covers issues from the past that could affect ownership rights.

There are two types of title insurance policies:

• An owner's policy protects the buyer's investment from hidden risks to the property's title and remains in effect for as long as the buyer or their heirs own the property. Although optional, it's highly recommended for all homebuyers.
• A lender's policy protects the mortgage lender's interest in the property from hidden risks and only covers the outstanding loan amount. Mortgage lenders require a loan policy for all financed transactions.

Owner's policies come in two coverage levels. Standard coverage protects against common title defects like forged documents, unknown heirs, and recording errors. Enhanced coverage provides broader protection, including coverage for certain issues that might arise after purchase, such as building permit violations or post-policy forgery. At Bluegrass Land Title, enhanced title insurance policies are the default for all eligible homebuyers.

Title insurance rates are regulated by the state and calculated based on the property's purchase price. When financing a home, buyers can get an owner's policy at a discounted rate when purchased alongside the required lender's policy.

Title Commitment

A title commitment outlines the terms and conditions under which the title insurance company will issue a title insurance policy. It serves as a preview of title insurance coverage and a summary of what the title search revealed about the property.

The title commitment outlines the findings from the title search, including any issues that must be resolved before closing and any exceptions that will remain on the policy. It also lists exceptions to coverage, which are items the title insurance policy will not cover. Common exceptions include easements for utilities, property restrictions from neighborhood covenants, and any liens or encumbrances accepted with the property.

The title company sends the title commitment to buyers so they can review what was found and understand what will (and won't) be covered by the title insurance policy.

Title Defect

A title defect is any problem with a property's ownership history that needs to be resolved before closing can occur. These issues can prevent buyers from receiving a clear, marketable title and must be addressed to ensure ownership rights are protected.

Common examples include missing links in the chain of title, defective or missing deeds from previous transactions, liens against the property from unpaid taxes or contractor bills, and encumbrances such as easements that weren't properly documented.

The title company's job is to identify these defects during the title search and work to resolve them before closing. In most cases, title defects can be cleared through proper documentation, payment of outstanding debts, or legal procedures.

Encumbrance

An encumbrance is anything that affects or limits a homeowner's property rights. It represents a claim, restriction, or burden that impacts how the owner can use their property or that gives someone else certain rights related to the property.

Encumbrances can take several forms, including liens, easements, and restrictions. The title company will identify all encumbrances during the title search and help homeowners understand which ones will remain with the property after closing. All encumbrances will be listed on the title commitment.

Easement

An easement is a legal right that allows someone else to use part of a property for a specific purpose, even though the property owner still owns the land.

Nearly every property will have a utility easement, which gives utility companies the right to access the property to install, maintain, or repair power lines, water pipes, sewer lines, or other infrastructure. Rights of way are another common form of easement, allowing others to cross the property to reach their own land or a public area.

Easements should be clearly marked on the property survey and will be noted in the title commitment. While easements limit how certain portions of the property can be used, they're generally necessary for neighborhood functioning and typically don't significantly impact property enjoyment.

Lien

A lien is a legal claim against a property that secures payment for unpaid debts. When someone places a lien on a property, they have a legal right to be paid from the proceeds if the property is sold. Liens must typically be satisfied before a clear title can be transferred to a new owner.

Types of liens include:

• Tax liens placed by government agencies when property taxes or other government debts remain unpaid
• Mechanics' liens filed by contractors or suppliers who performed work but weren't paid
• Judgment liens resulting from court decisions where money is owed.

The title company will identify any existing liens during the title search and ensure they're properly addressed before closing.

The Closing Process

The closing process brings together all parties and paperwork to complete a real estate transaction. This final phase involves signing documents, transferring funds, and officially recording the change of ownership.

Closing

Closing, also known as settlement, is the final step in a real estate transaction where ownership officially transfers from seller to buyer. This is when all preparation and paperwork come together to complete the sale.

Most residential closing appointments last 30 to 45 minutes. During this appointment, both buyer and seller review and sign all necessary documents, including the deed, loan paperwork for financed transactions, and other legal documents required to transfer ownership.

At closing, all financial aspects are finalized. The seller receives proceeds from the sale, any existing mortgages or liens are paid off, and the buyer provides their down payment and closing costs. For financed transactions, the lender funds the new mortgage loan. Once all documents are signed and funds are exchanged, the deed is recorded with the county clerk, making the sale official and public record.

Escrow

Escrow is a neutral third-party process where funds and documents are held until all conditions of the real estate transaction are met. This arrangement protects both buyers and sellers by ensuring that money and property ownership only change hands when everyone has fulfilled their obligations.

The title company serves as the escrow agent, acting as a neutral party that holds the earnest money deposit, down payment, and other funds while ensuring that all contract conditions are satisfied. They also prepare and hold important documents like the deed until everything is ready for closing.

The title company coordinates with all parties involved to make sure every contractual and legal requirement is met. They verify that the seller has clear title, that the buyer's financing is approved and ready, and that any repairs or other contract conditions have been completed.

Settlement Statement

The settlement statement, also known as the ALTA or ALTA Settlement Statement, is a detailed document that shows exactly how money changes hands in a real estate transaction. This comprehensive breakdown accounts for every dollar involved in the purchase or sale.

The settlement statement lists all costs and credits for both buyer and seller. For buyers, it shows the purchase price, down payment, loan amount, closing costs, prorations for taxes and utilities, and any credits received. For sellers, it details the sale price, existing mortgage payoffs, real estate commissions, closing costs, and the net proceeds they will receive.

The title company prepares the settlement statement and typically sends it to all parties for review before closing. This gives everyone the opportunity to verify that all numbers are correct and that the financial arrangements match what was agreed to in the contract.

Power of Attorney

A power of attorney (POA) is a legal document that gives someone else the authority to sign documents on behalf of another person during a real estate transaction. This arrangement allows transactions to proceed even when someone cannot personally attend closing.

For real estate transactions, the power of attorney must specifically grant authority to buy or sell real property. A general POA or one written for other purposes typically won't be sufficient. The document must clearly state that the chosen representative can sign deeds, mortgages, and other real estate documents.

If you plan to use a Power of Attorney for your real estate transaction, your title company will need to review this document before closing. 

Remote Online Notarization

Remote Online Notarization (RON) allows completion of real estate closings from anywhere using video technology and electronic signatures. Instead of meeting in person at a title company office, participants can sign documents online while connected to a notary via secure video conference.

During a RON closing, the notary verifies identity using knowledge-based authentication and credential analysis, then watches as documents are electronically signed in real time. This technology provides the same legal protections as an in-person closing while offering greater flexibility and convenience.

Digital closings can be scheduled during extended hours, including evenings and weekends, making it easier to accommodate busy schedules or situations where traveling to a physical location is difficult.