Title insurance provides protection against title defects that were unknown to you at the time you purchased the policy.
The term “title” refers to the collected ownership records of a piece of real estate, including the transfer of any property rights, and any loans using the property as collateral. A clear line of title makes you much less vulnerable to ownership claims from other parties and to outstanding debts of previous property owners.
Before writing a policy, a title company will check for defects in your title by examining public records, including deeds, mortgages, wills, divorce decrees, court judgments, tax records, liens, encumbrances, and maps. The company will then defend in court any claims to the property that are covered by your policy, subject to certain limitations. If the company loses, it will pay you for covered losses up to the amount of your policy.
Title companies also handle the closing of a property sale and hold any earnest money in a trust account until the purchase is complete.
The two most common types of title policies are “mortgagee policies,” which protect lenders, and “owner policies,” which protect property buyers.
Most lending institutions won’t loan you money to buy a house or other property unless you purchase a mortgagee policy. This policy will repay the balance of your mortgage if a claim against your property voids your title.
Mortgagee policies remain in effect until the loan is repaid. Most lenders will require you to buy a new mortgagee title policy if you refinance your home. When the new loan pays off the existing loan, the old mortgagee policy expires. You are entitled to a premium discount on a new mortgagee policy if you refinance within seven years.
Owner polices insure property owners against the specific kinds of claims listed in the policy. When you buy a house and purchase a mortgagee policy, a title company will automatically issue an owner policy – for a set premium – unless you specifically reject it in writing.
An owner policy remains in effect as long as you or your heirs own the property or are liable for any title warranties made when you sell the property. You should keep your owner policy, even if you transfer your title or sell the property.
Title policy forms are standardized. This means the policy language is the same, regardless of the company. Different companies may describe their coverage exceptions differently, however. Therefore, it’s important that you read your policy carefully. Pay special attention to “Schedule B” of the policy, which explains any limitations, exclusions, exceptions, and special conditions. You may want to discuss these exceptions with an attorney before you close on a real estate deal.
Also, check the policy’s legal description of the land against your survey and your earnest money contract. Title insurance generally does not protect against boundary disputes with neighbors. However, this coverage is available for purchase for an additional premium.
A title policy does not guarantee that you will be able to sell your property or borrow money on it, or that you won’t lose money if you do sell it.
Title insurance only protects you from claims of ownership. It does not insure against fire, flood, theft, or any other type of property damage or loss.
An owner policy only covers you up to the value of the property at the time you purchased the policy. It does not cover any increase in value, unless you purchase a special “increased value endorsement.”
A mortgagee policy covers up to the amount of the principle on your loan.
The premium for a title policy is paid only once, at the closing of the sale. The buyer and seller may negotiate who pays the premium.
Title insurance premium rates are set by the state insurance regulations and are based on the property’s sale value using a sliding scale. For example, the basic premium for a $50,000 property is $520, and the basic premium for a $100,000 property is $871.
Some title companies add extra charges for tax certificates and escrow fees, recording fees, and delivery expenses. Review any extra charges carefully; you may negotiate or demand documentation of the true cost of these services. You have the right to receive your closing papers a day in advance of the closing if you request. You may also have an attorney attend the closing with you.
If someone claims an interest in your property, a title company will defend your title in court and pay for any actual loss under these circumstances:
A lien against your title exists because a previous owner failed to pay a mortgage or deed of trust; a judgment, tax, or special assessment; or a charge by a homeowners or condominium association. If you receive notice of a previous lien, contact your title company immediately and follow your policy’s claim filing procedure. Failure to do so could jeopardize your claim.
A lien exists for labor and materials furnished by a contractor without your consent. Generally, your policy protects you if you buy your house already built, but not if you own the land and contract with a builder to build your home. Consult an attorney about your rights.
Other liens or encumbrances on your title exist but aren’t listed in the policy exceptions.
Leases, contracts, or options on your land weren’t recorded in the public records and disclosed to you.
The title policy failed to disclose legal restrictions on how you can use your property.
An easement exists that isn’t in public records and that you don’t know about. The title policy assures you a legal right of access to your property. This means that you have a right to travel from your property to a public street or road.
A notary public erred or someone failed to properly sign a document in your chain of title, made an error in recording the document at the county clerk’s office, or failed to deliver the deed according to statutory requirements.
A deed or other document in your chain of title is invalid as a result of forgery, fraud against the rightful owner, a signature given under duress, or a signature by a person legally incompetent to sign or someone claiming to be someone else.
In general, a title policy won’t cover problems with your title that occur after the date you purchased the policy, nor will it protect you from problems that you create or from problems unrelated to your or the lender’s property interests.
Your policy also will not cover any special exceptions – such as a public utility easement – added by the title company during the title examination process. These exceptions must be listed in Schedule B of your policy. The company must make you aware of each exception and describe it using common language so that you can easily locate the reason for the exception in public records.
In addition, a title policy generally will not cover the following:
Effects of your failure to pay value for your property.
An unrecorded title defect that you knew about or allowed to occur.
Violations of building and zoning ordinances and other laws and regulations dealing with land use, land improvements, land division, and environmental protection.
Restrictive covenants limiting how you may use the property and prescribing requirements for buildings constructed on the property. Schedule B lists these restrictions. Be sure to request copies of any restrictions and have your attorney explain them. The title company may charge you for the copies.
Losses resulting from rights claimed by “parties in possession,” such as renters or adverse claimants who occupy the land. If you object to the exception, the title company may inspect the property and delete the exception from your policy. The title company may charge for the inspection.
Condemned land, unless the condemnation occurred before the policy date and is binding on you even if you bought the land without knowing it was condemned, or unless a condemnation notice appeared in public records on the policy date.
Homestead, community property, or survivorship rights, if any, of a policyholder’s spouse. Texas homestead laws uniquely address the rights of a spouse or survivors of a property owner. Have your attorney explain your rights and limitations under the law.
Conveyance of title irregularities arising from a deceased person’s estate, a bankruptcy estate, or a trust. Consult an attorney to have these situations explained to you.
Claims from other people who may have certain rights if your property is on or near the shores of a body of water or has a river or stream flowing through it. If you don’t understand the rights of others to use your property because its situated on or near a body of water or created with fill, ask your attorney for an explanation.
Certain taxes and assessments. Your title policy ensures that all property taxes and assessments are paid for the most current year available. However, certain tax exemptions enjoyed by previous owners could result in more taxes being assessed against your property in the future. If you buy property with borrowed money, the lender may ask that its mortgagee policy delete the exception for “subsequent taxes and assessments by any taxing authority for prior years due to change in land usage or ownership.” In such cases, the title company may require that the assessment be calculated and paid.