What Is Title Insurance and Why Do You Need It?
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Title insurance is not just another fee involved with closing costs. It can offer valuable protection for homeowners. As owner's policies are optional in Texas, many buyers may not be fully aware of what title insurance does and doesn't cover. Below are some common questions including who pays for it, how much it costs, and how it can benefit both the buyer and the seller.
Key points from this article:
- Definition – Title insurance protects against financial losses due to defects in the title to real estate, covering legal defense against lawsuits attacking the title or reimbursing the insured up to the policy limit for covered losses.
- Types – Two types of title insurance policies exist: the owner's policy protecting the buyer's interest, and the loan policy protecting the mortgage lender's interest.
- Coverage – Title insurance covers losses from title defects, liens, or ownership claims by other parties arising before the property purchase, with the title company defending the insured in court against claims.
- Cost and Payment – Title insurance cost in Texas is regulated by the Texas Department of Insurance and is based on the property's sale value. Typically, the seller pays for the owner's title insurance policy, while the buyer covers the loan policy, although this is negotiable.
Disclaimer – The information on this page is intended for general informational purposes only and not to provide legal advice.
FAQs about Title Insurance
What is title insurance?
Title insurance protects against financial losses that can be caused due to defects in your title to real estate. When you have title insurance, your insurance company will defend you against lawsuits attacking the title, or in the case of a covered loss, reimburse the insured up to the policy limit.
Title insurance agents would identify any existing defects in the title that need to be corrected by the seller before the buyer purchases the property. Agents check for potential problems with the title by searching public records, including deeds, mortgages, wills, divorce decrees, court judgments, tax records, liens, encumbrances, and maps. Your title insurance policy remains in effect for as long as you, or your heirs, have an interest in the property.
What types of title insurance are available?
There are two types of title insurance policies. One is the owner's policy, which protects the buyer's interest in the property. The other is the loan policy, which protects the mortgage lender's interest, and would cover the lender up to the principal amount on the loan.
What does title insurance protect or cover?
An owner's policy protects you against loss from title defects, liens, or ownership claims by other parties. It only protects you against losses from issues that arose before you purchased the property. The title company would defend you in court if there is a claim against your property and would pay for covered losses resulting from these claims.
The loan policy protects the lender's interest in the property until the mortgage is paid off by the borrower.
Why should a buyer get title insurance?
It's the same as with any other type of insurance policy you would have and is a matter of being safe rather than sorry. For most of us, our home is our most valuable asset, and if there are any title defects, even if it shows up many years after you purchased the property, the equity you have in your home would be at risk. Title insurance protects your real estate investment.
Is title insurance necessary?
Owner's policies are optional and not required in Texas. However, most lenders will require that you take out a loan policy as a condition of your mortgage. This policy would cover the balance of your mortgage if a claim against your property makes your title void, and would cover the lender up to the principal amount of your loan.
Do you need title insurance for a new construction home?
Yes, even if you are buying a newly constructed home, it may have been built on land that is part of a larger parcel, which can have undiscovered defects. In that case, title insurance would protect you against these claims.
How much does title insurance cost in Texas?
TDI regulates title insurance premium rates, which are based on the property's sale value. Therefore, Texas title agents must charge the same premium for all properties of the same value.
TDI provides a chart for determining the amount your title insurance basic premium rate would be. The basic premium rate includes the costs for title examination, closing fees, and issuing the policy. The title policy premium is paid only once at closing.
Additionally, title agents may charge for tax certificates, escrow fees, recording fees, and delivery expenses. As these expenses can vary between agents, make sure you review the full list of charges carefully.
Who typically pays for title insurance?
In Texas, it is typically the seller who pays for the cost of the owner's title insurance policy issued to the buyer, but it is negotiable. If buying a new construction home, the buyer would likely pay for their owner's policy instead of the builder. The buyer usually pays for the cost of the loan policy issued to their mortgage lender. Loan policies cost less than owner's policies, and both are one-time premium payments, which are made at the closing.
When selling your home off market to a house buyer, the house buyer will typically pay the title costs. A lot of paperwork is involved in buying a home and most house buying companies work with the same title company whenever possible to reduce their need to provide paperwork, as their “usual” title company will have all of their documentation on file. Additionally, home buyers are usually working with distressed sellers, the buyer paying for the title policy helps alleviate some financial stress from the seller.
Who typically chooses the title company?
It usually depends on who is paying. If the seller pays for both the owner policy and the loan policy, then the seller can pick the title company according to the Real Estate Settlement Procedures Act (RESPA). However, if the buyer pays for the owner's policy, then the buyer gets to pick the title company. In the case where the seller pays for the owner's policy and the buyer pays for the loan policy, which is often the case in Texas, then the seller cannot insist on a particular title company.
Your real estate agent or mortgage lender can usually offer suggestions on title insurance companies to work with. It's important to make sure that the agent you use is licensed, as it's illegal to sell title insurance without a license in Texas. If you buy from an unlicensed company, any claims you have could go unpaid.
What role does the title company fulfill?
The title company makes sure that the title is “free and clear,” then issues title insurance for that property. Title companies often maintain escrow accounts which contain the funds needed to close on the home, to ensure that those funds are only being used for the settlement and closing costs, and may also conduct the formal closing on the property. At the closing, a settlement agent from the title company will bring all the necessary documentation, explain it to the parties, collect closing costs, and distribute funds. The title company would also ensure that the new title and other documents are filed with the appropriate entities.
What does an escrow officer do?
An escrow officer assists in the many necessary tasks which must be undertaken between the seller and buyer during a property transaction. They are considered a neutral third party and their responsibilities include preparing escrow instructions, holding and disbursing funds, preparing title documents, and obtaining signatures on the paperwork. Many escrow officers are also notaries and can notarize the legal documents involved in the sale of real estate.
How does the seller benefit from using a title company?
The seller's main goals when selling a home are to sell it quickly and at the best price. By using a title company, the seller is proving to the buyer that they have nothing to hide, specifically that there are no liens or judgments against the home. By doing this, it reassures the buyer that they'll be able to obtain the property title “free and clear” which can help speed up the sale for the seller.