Q. What is title insurance?
Title insurance is protection against loss arising from problems connected to the title to your property.
Before you purchased your home, it may have gone through several ownership changes, and the land on which it stands went through many more. There may be a weak link at any point in that chain that could emerge to cause trouble. For example, someone along the way may have forged a signature in transferring title. Or there may be unpaid real estate taxes or other liens. Title insurance covers the insured party for any claims and legal fees that arise out of such problems.
Q. Why do we need title insurance?
Title insurance exists to protect the investment made by homeowners in their real property, which is typically a family or an individual’s most valuable asset. When you purchase a piece of real property, you will find that the owner, the owner’s family, and the owner’s heirs may all have rights or claims to that piece of property. There may be other entities with an interest in the property as well, such as building contractors, lenders, judgment creditors, taxing authorities (like the IRS), or various other individuals or corporations. The real property that you are purchasing may be sold to you without knowledge that one or more of these parties has a right or claim to that property. These rights and claims remain attached to the title on the property until they are extinguished. But sometimes, they don’t come to light until after the date of purchase by an unsuspecting homebuyer.
Q. Why is transferring the title to real estate different from transferring the title to other items, such as a car?
Because land is permanent and can have many owners over the years, various rights in land (such as mineral, air or utility rights) may have been acquired by others by the time you come into possession of it, even if the land has never before been built upon. So in order to transfer a clear title to a piece of land, it is first necessary to determine whether any rights are outstanding.
Q. What is a title search?
A title search is a detailed examination of the historical records concerning a property. These records include deeds, court records, property and name indexes, and many other documents. The purpose of the search is to verify the seller’s right to transfer ownership, and to discover any claims, defects and other rights or burdens on the property.
Q. Doesn’t the seller’s deed take care of giving me clear title?
Not at all. A “deed” is merely an instrument whereby a seller transfers his or her right of ownership, whatever it may be, to you. It is not proof that the person described as the seller is actually the owner. It does not do away with claims or rights others may have in the property. From the deed, you cannot determine what rights, liens or claims may be outstanding against your title.
Q. Why do mortgage lenders require title insurance?
Whenever a lender commits to loan money on a piece of real property, it takes certain steps to establish the security of its prospective investment. (Recent history suggests that some of them are perhaps a little better about this than others—but in most cases, anyway, the lender goes to great lengths to make sure that they will see a return on their money.) The security of a mortgage loan is protected by conducting a due diligence investigation of both the purchaser/borrower and of the property itself.
With respect to the property, a significant part of the lender’s due diligence involves determining the status or quality of title to the property. The lender does this by obtaining a loan policy of title insurance. The loan title policy is purchased to protect the lender’s interest from loss due to unknown title defects or certain kinds of matters (such as unpaid property taxes or mechanics liens, for example) that may exist but remain unknown at the time of the loan.
Q. If the Lender is paying for Title Insurance, why do I need a title policy?
The loan title policy taken out by the lender only protects the lender’s interest. It does not cover claims made by the purchaser/borrower. That is why the purchaser/borrower typically obtains an owner’s title policy, which protects his or her ownership interest from loss due to title defects or other related issues. The owner’s title policy can be, and often is, issued at the same time as the lender’s policy.
Q. What if a mortgage shows on the commitment, but has been paid off?
Because a release has not been filed at the respective county, for liability purposes we cannot remove this from the commitment. In some cases failure to fulfill the requirement of getting a proper release filed could lead to a final policy not being issued, or it being issued with this as an exception. Some states can use other means of clearing a paid mortgage, these needs to be handled on a case-by-case basis.
Q. If a Lender has title insurance protection but the owner does not, what possible danger of loss could the owner face?
As an example, let’s consider a purchase of real property in the amount of $200,000. The purchaser makes a down payment of $40,000, which is the amount of their equity in the property. They then take out a mortgage loan for $160,000. This is the amount that the lender seeks to insure, as it represents the extent of their investment in the transaction. In such a scenario, the purchaser’s equity of $40,000.00 is not protected.
So what would happen if some other matter arises affecting the past ownership of the property? The title insurance company would only defend and protect the interest of the lender. The owner/borrower would have to assume the financial burden of the legal defense. And if the legal defense is not successful, the result could be a total loss of title. In such a scenario, the title insurance company pays the lender’s loss, and perhaps takes an assignment of the owner/borrower’s remaining debt. But the owner/borrower loses the down payment and any other equity that may have accumulated, as well as the property itself. And the balance of the note must still be paid.
Q. How can there be a title defect if the title has been searched and a loan policy issued?
Title insurance is issued after careful examination of public records pertaining to the property and/or its owners. But even the most thorough search by the best and most experienced title examiners cannot guarantee that there are no title hazards present. This is because there are many different kinds of potential title problems that cannot be disclosed or discovered through search of public records. Examples would include:
− False impersonation of the true owner of the property
− Forged deeds, releases or wills
− Undisclosed or missing heirs
− Instruments executed under invalid or expired power of attorney
− Mistakes in recording legal documents
− Misinterpretations of wills
− Deeds by persons of unsound mind
− Deeds by minors
− Deeds by persons supposedly single, but in fact married
− Liens for unpaid estate, inheritance, income or gift taxes
Q. How long does my coverage last?
For as long as you or your heirs retain an interest in the property and, in some cases, even beyond.
Q. What are exceptions and/or requirements on commitments?
The exceptions on a Limited Title Policy are basically the liens and/or judgments that show of record. On a limited policy these items do not need to be taken care of on behalf of the underwriter because the policy has already been issued with them on it. However, they do need to be taken care of to ensure the lien position you need.
The requirements on a Full Alta Commitment are items that may or may not need to be taken care of to ensure the lien position you need when the final policy is issued. Whatever items remain after a certain period of time after the loan has been closed will then be shown as exceptions to the final policy.
Q. What protection does title insurance provide against defects?
Title insurance will pay for the defense against any lawsuit attacking your title as insured and/or reimburse you for your losses cause by the title defect as provided in the owner’s title policy. The title company will either clear up covered title problems or pay the insured’s losses. For a one time premium, an owner’s title insurance policy remains in effect as long as you or your heirs retain an interest in the property, or have any obligation under warranty in any conveyance of the land.
Q. What is a Cloud on the Title?
“Cloud” is a (Title Defect) affecting title to the property. An example would be if a title search on a property showed that a deed had been recorded transferring title from the previous owner to the new owner. The problem came when it was noticed that the deed was signed by only one of the two owners. Due to an oversight, the wife’s signature wasn’t on the deed. This meant that the wife could still make a claim to the property. In effect, she was still in title as an owner because she hadn’t transferred her interest in the property.
Q. What is a HUD-1?
A HUD-1 is the closing form used in settlements. It includes an itemized list of all applicable closing costs and specifies the extent
to which each party is responsible for those costs.
Q. What is a survey? When do I need to get one?
A survey is a process by which a parcel of land is measured and its areas ascertained. Normally a survey is not needed for refinance or home equity loans unless there is a problem with the legal or it appears there are encroachments to the property. A survey may also be required when land is or has been divided and the legal description is not clear.
Q. What is an endorsement to a title insurance policy?
An endorsement is used to amend coverage provided in a policy. An endorsement can either extend additional coverages to the insured or limit certain coverages provided in the policy. Most endorsements extend coverage, and many require the payment of a fee which is not part of the premium.
Q. Why Do I Need to Purchase a New Policy When I Refinance?
You don’t need a new owner’s policy, but the lender will require you to purchase a new lender policy. Even if you refinance with the same lender, the existing lender’s policy terminates when you pay off the mortgage. Furthermore, the lender is concerned about title issues that may have arisen since you purchased the property, such as the lien mentioned in an earlier question. A new title search will uncover the lien, and you will have to pay it off as a condition for the refinance.
Insurers generally offer discounts on policies taken out within short periods after the preceding policy. In some cases, discounts are available as far out as 7 years from the date of the previous policy. Ask for it, it may not be offered if you don’t.
Q. On a refinance, am I entitled to a credit on the loan policy if I do not close with the same title company?
The Texas Department of Insurance regulates all title premiums in the state of Texas. They do offer a credit on a refinance transaction for the loan policy premium if the last loan policy issued was seven years or less, regardless of the title company that issued the policy.
A credit is issued as follows:
− 40% for a loan policy less than 2 years old
− 35% for a loan policy greater than 2, but less than 3years old
− 30% for a loan policy greater than 3, but less than 4years old
− 25% for a loan policy greater than 4, but less than 5years old
− 20% for a loan policy greater than 5, but less than 6years old
− 15% for a loan policy greater than 6, but less than 7years old
Q. Is it common in Texas for the seller to pay for the buyer’s owner’s title policy?
Yes, in Texas it has been standard for the Seller to pay for the Buyer’s owner’s title policy unless negotiated otherwise.
Q. If closing prior to the end of the year, is it imperative that the taxes be paid for the entire year?
In Texas, property taxes for the current year are due and payable on October 1, and are delinquent on February 1 of the following year. If you close your transaction on or after October 1, and want the policy to insure that taxes for the current year are paid, then the title company must collect the taxes and pay them to the different taxing authorities. Almost all lenders require taxes to be paid at closing if the closing occurs after October 1. Regardless of whether taxes are paid, they will be prorated through the date of the closing, with each party being charged for taxes based on the portion of the year for which they own the property in question.
Q. Is there any way to protect against hidden risks?
Yes, with a Title insurance policy. Under the terms of a Title policy, you are protected against risks and insured against loss. If your title as insured is ever attacked, Burnet Title stands ready to defend it in two ways:
1. If it is necessary to enter a legal defense of your rights under the policy in any suit or proceeding adversely affecting the title as insured, your Title policy will ensure that your title is defended at no cost to you.
2. If a loss is sustained, you are protected up to the full amount of your policy, which usually is equal to the full purchase price you paid for the property.
Q. What is the Texas Homestead Exemption?
Stated simply, the Texas Constitution and various statutes establish the homestead rights in Texas. The homestead rights protect a family’s homestead from claims of creditors, both secured or unsecured, with the following exceptions.
A forced sale of a homestead can occur if the debt arises from either:
− Funds borrowed to finance the initial purchase price of the homestead.
− Funds borrowed to finance work and materials used in construction of permanent improvements on the homestead (if contracted with a mechanic’s lien)
− Taxes due on the homestead; including a federal tax lien.
− Home equity and reverse mortgage loan
− A property improved owelty of partition lien created upon partition of the property.
− Certain assessments levied by property owners’ associations (HOAs).
Forced sale of a homestead cannot occur if the debt in question arises from typical consumer transactions. Put another way, automobile finance companies, issuers or credit cards, or holders of unsecured debt typically cannot foreclose on your homestead.
Q. What are the applications of the Homestead Law in Texas?
Texas Homestead law provides that the homestead of a family, or of a single adult person, is protected from forced sale for the payment of all debts, except for those specifically authorized under the constitution (see above).
Q. What does Texas law say about home equity loans?
Since January 1, 1998, Texans with sufficient equity in their homestead property have been allowed to use that equity to secure a loan, the proceeds of which may be used for any purpose desired by the homeowner. In most cases, Texans using their personal residence property as security for a home equity loan are able to claim the interest paid on the loan as a deduction from taxable income. If the loan is not repaid, the homestead property may be subject to foreclosure.
For many years, Texans were not allowed to borrow against the equity in their homesteads, largely due to concern that irresponsible borrowing or lending might cause families to lose their homestead properties to foreclosure. In order to protect against such losses, the laws authorizing home equity loans in Texas included a number of safeguards in the form of restrictions on both the borrowers and the lenders. These include:
− Voluntary consent to the lien by all owners and their spouses.
− Total borrowing against a homestead property may not exceed 80% of fair market value.
− Loans are non-recourse to the borrower unless obtained through fraud.
− Judicial foreclosure process is required.
− Only one second-lien equity may exist on a property at anytime.
− Lender may not require any additional security be pledged.
− Lender may not accelerate the debt or foreclose simply because fair market value of the property has declined.
− The loan must be repaid in equal monthly installments; no balloon payments.
− No prepayment penalty is allowed if the loan is paid off early.
− Agricultural property may not be used.
− Only qualified lenders will be allowed to make Home Equity loans.
− Borrowers may not close until 12 days after receiving a prescribed disclosure notice from the lender.
− Borrower may rescind the transaction within 3 days after closing without cost.
− Total fees associated with the loan may not exceed 3% of the loan amount.
Obviously, this is a very general discussion of the restrictions and requirements relating to home equity loans. Certain restrictions may not apply to every loan. If you are considering a home equity loan, you should obtain professional advice before doing so.
Q. How do I declare a homestead?
Upon purchasing a home, simply contact the appraisal district for the county in which the home is located, and request the necessary forms for declaring your homestead.
Dallas County (214) 631-0910
Collin County (972) 578-5200
Denton County (972) 434-2602 Metro
Collin County (817) 284-3925
After you move into your new home, you may receive solicitations in the mail offering to file homestead paperwork for you in exchange for a fee. It is not necessary to pay anyone to perform this service for you. The process is simple, and there is no charge to declare a homestead.
Q. What will happen at my closing?
Your closing will take place at Lawyers Title, which will act as escrow agent and title insurer. As is set forth in the contract for purchase of your real property, the title insurance agent may hold the earnest money, prepare the closing statement, and generally coordinate with all of the various entities involved in the closing. This includes collecting invoices and written information from the mortgage lender, insurance agent, surveyor, attorneys for the parties, the tax search firm, inspection companies, and the title underwriter. In addition to acting as escrow agent, the title company will research the title to your home and issue a commitment for the title insurance reflecting the ownership, restrictions, easements, liens and other exceptions that will have an effect on the property.
At the time of closing, the title company will allocate the fees between the purchaser and seller in accordance with the contract, lender’s instructions and local custom. The closing will take about forty-five to sixty minutes; however, occasionally there are last minute delays from one of the many servicing companies, especially at the end of the month.
After the buyer and the seller have signed the necessary documents, the title company will return the mortgage papers and proposed title policies to the lender for review and funding of the loan. Upon receipt of the buyer’s funds and the loan amount, the title company will disburse all proceeds as shown on the closing statement and cause the deed and deed of trust to be recorded with the county clerk. Title insurance regulations require funds to be in the form of either a cashier’s or certified check payable to the title company or transferred to the title company’s bank via wire transfer.
Q. Do I have to use the Title Insurance Company recommended by my attorney, lender, or realtor?
No. You have the absolute right to choose your own title insurance company. Simply provide your attorney, lender, or realtor with the “Certificate of Entitlement” that is available to be printed from this site early in the closing process to avoid confusion. Also, if anyone insists that you use a company they recommend, it’s in your best interest to ask them if they are receiving a commission or referral fee from the company or if they are affiliated with the company they are recommending. Title agent commissions can be as high as 90 percent of the title premium you are being asked to pay.
Q. How are title insurance rates determined?
The policy forms, premium rates, rules, and procedures for issuance of title insurance are all promulgated and controlled by the Texas Department of Insurance, in accordance with Chapter Nine of the Texas Insurance Code. Because title insurance rates are promulgated by the State, this means that all title companies charge exactly the same premium rates for a given piece of property. Please see our title insurance calculator for more information.