Title insurance is a necessary part of any Texas home sale, but what does it actually do? Learn more about the coverage title insurance provides.
If you’ve ever bought a home, title insurance was probably part of the deal. The closing might have even been at a title company office. Title insurance is one of the less-understood parts of the homebuying process. While it can be rather confusing, it’s the sort of thing that you’ll be happy to have should you ever need it.
Homeowner’s insurance covers various damages to your home. Title insurance covers certain defects or other problems in your legal right to ownership of your home. If that still doesn’t quite make sense, don’t worry. Read on to learn more about exactly how title insurance works.
What is homeowner’s title insurance?
The term “title” refers to ownership of a home or other real estate. In order to transfer ownership, the title must be “clean” or “clear,” meaning that no one else has any sort of claim to the property. Title insurance can protect you and the lender in case someone tries to make this kind of claim.
Title companies in Texas serve several functions in the real estate sales process. In addition to providing title insurance policies, they often also act as the escrow agent.
» READ MORE: What’s a Mortgage Escrow Account? Do I Need One?
What does homeowner’s title insurance cover?
Two kinds of title insurance policies are available:
Owner’s policy: This protects you, as the homeowner, for as long as you own the property.
Lender’s policy: This protects the mortgage lender for as long as they have a lien on the property, i.e. until you pay off the loan.
Issues that title insurance may cover include:
Claims to ownership
Errors in deeds and other documents, including drafting errors, filing errors, and incorrect signatures
Fraudulent documents, such as forged signatures
Easements that were granted by a prior owner but never filed with the county clerk
Liens against the property that have not been released
Before you close on a home, your title company will perform a title search to look for any possible claims on the property or other problems with the title. If they find problems with the title, they will let the real estate agents know. The title company might determine that the insurance policy they issue will not cover those problems. They might decide not to issue a policy at all until someone fixes the problems.
Here's an example of when homeowner’s title insurance is used.
The title company might find, for example, that someone sold the property to three people 25 years ago, but when the property was sold 15 years ago, only two of the three people signed the deed. If this was a mistake or, worse, a deliberate decision to exclude the third person, they or their heirs could still have a claim to the property.
Issues covered by title insurance often come up when someone claims an interest in the property. In this example involving the three prior owners of the property, the owner who was excluded from signing the deed could file suit for fraud against the other two. The lawsuit would have to involve you since you now own the property. Title insurance should pay for the cost of defending against the suit.
What is a “clean” title?
A clean title is free of any errors, defects, or potential claims. Transferring ownership of real property from one person or group of people to another involves some fairly strict procedures. A deed has to be worded a certain way, and everyone with an ownership interest has to sign it. If a deed or other document contains an error, this could create a problem with the title.
Title to property could also become dirty because of unknown or overlooked legal claims. People can acquire a claim on real estate in various ways, such as by filing a lien or other legal document. They may also claim to have an easement or other limited right to the use of the property.
Why is title insurance necessary?
First, mortgage lenders typically require title insurance. They will place a lien on your property after closing, which gives them the right to foreclose if you default on the loan. They want to make sure, as much as possible, that no one else has any sort of claim on the property.
Even without the lender’s title insurance requirement, having coverage may still be a good idea. Disputes over title to property are fairly rare these days, but when they do occur they can be very costly, in terms of both time and money.
How much does title insurance cost?
In Texas, state law sets uniform rates for title insurance. Owners’ premiums are based on the purchase price, while lenders’ premiums are based on the loan amount. A single premium paid at closing provides coverage for the entire term of the policy.
Who pays for title insurance?
Texas has a custom when it comes to title insurance premiums. The buyer pays for the lender’s policy, and the seller pays for the owner’s policy. When you buy a home, the seller would traditionally pay for your title insurance coverage, and you would pay for the next owner’s coverage.
As this is only a custom, not a law, rule, or formal policy, you may work out a different arrangement for your own closing. You might agree to pay for your own owner’s policy, for example, in exchange for additional concessions from the seller.
Have questions about paperwork?
When you’re valued as a client, you shouldn’t be expected to understand all the mortgage jargon that comes your way. The Wood Group of Fairway is happy to guide you through the process in a simplified way. Feel free to ask questions at any time.