Buying a home is a complicated, drawn-out process. This potentially is the biggest investment you've made in your life, and it pays to make sure you do the correct due diligence to minimize your risk. One way to protect yourself is with title insurance. A title policy will pay out if the home you're buying turns out to have problems with its title.
There are two types of title insurance in Texas: an Owner's Policy and a Loan Policy. It is customary for the seller to pay for the Owner's Policy and the buyer/ borrower to pay for the Loan Policy.
What Is a Title Policy?
A title policy insures against losses caused by defects in the title to the property you're buying. A title defect is anything that casts doubt on the seller's ownership, gives someone else a right over the property or has the potential to reduce the value of the property in some way. If an earlier title deed is found to be forged, for example, this is a title defect because it means someone else may actually own the property.
Here are some examples of title defects:
A title document that is not properly signed, witnessed, notarized or delivered. "Delivered" means that the person signing the document intended for it to have legal effect
he was not preparing a draft document, for instance. No right of access to and from the property. A right of way or other easement over the land that you don't know about. Easements can arise by virtue of long user, meaning someone has exercised the right for a long time. It may not necessarily be written down in the title documents. A document signed under a defective power of attorney. Claims by previously missing heirs. A document that was not properly recorded in the public records. A lien over the property, for example, a mechanic's lien for unpaid labor costs or an old mortgage that a previous owner failed to pay off.
What a Title Policy Doesn't Cover
As with all insurance policies, there are certain things that a title policy will not cover. It will not cover title defects that arise, or that you create, after the policy is issued. It will not cover any misbehavior on your part, such as a failure to pay your mortgage, pay taxes, or observe any deed covenants, laws, zoning ordinances or other regulations relating to the property. There may be other exclusions, too, so read the policy so you understand what is covered.
How Title Policies Protect Homeowners
The title insurance company will defend any claims of ownership or rights by other parties. So, if someone comes along in the future and claims to have a lien over your home, then the title company will attempt to defend that claim in court.
If the claim is legitimate, then the insurance company will assist you in reaching a resolution. Often, this means paying off the third party and instructing an attorney to prepare the necessary documents to clean up the title. In this scenario, the insurer will pay the compensation or damages, plus legal fees and court costs, up to the policy limit.
Where a defect cannot be removed, such as a right of way that a third party will not release, then the payout generally will represent the difference between the price you paid for the property and what it is now worth with the title defect in place. This assumes the claim is a covered loss. Like all insurance coverage, the payout will not exceed the policy limit.
Two Types of Title Insurance
There are two types of title insurance: an Owner's Policy and a Lender's or Loan Policy. An Owner's Policy protects you, the homeowner, should a claim arise. You buy the title insurance once, for a one-time fee at closing. The policy lasts for at least as long as you and your heirs own the home. It may even last forever in some circumstances, for example, if you make promises about the quality of the title when you eventually sell the home.
You are covered for the amount you paid for the home. If your home increases in value over time, or you add improvements, then you can buy an endorsement to increase the policy limit.
A Lender's Policy, on the other hand, protects the lender. It does not protect the buyer. The policy limit is generally based on the dollar amount of your loan, which means the coverage amount decreases as you pay down your loan. Their coverage disappears entirely when the loan is paid off.
Does Texas Require Title Insurance?
The state of Texas does not require title insurance. If you are a cash buyer, it is your decision whether to buy an Owner's Policy or not.
However, if you take out a mortgage, the lender will insist that you buy a Loan Policy to protect their interest as a condition of the mortgage. In practice, most cash buyers purchase an Owner's Policy, and financed home buyers purchase both an Owner's Policy and a Loan Policy.
Paying for Title Policy in Texas
While there are no hard-and-fast rules, it is customary for the seller to pay for the Owner's Policy. The payment will appear as a seller's contribution to closing costs on the settlement statement.
The buyer/ borrower typically will pay for the Loan Policy.
However, this position is negotiable. As a buyer, you can ask the seller to pay for the Loan Policy. As a seller, you can ask the buyer to pay for the Owner's Policy. Whatever you negotiate, the agreement should be written into the sale contract as part of the larger deal.
Title Policy Cost in Texas
One thing you don't have to worry about in Texas is shopping around for the best policy. That's because the terms of the policy and the premium rate are established by the Texas Department of Insurance. The title policy document is standardized, and all title insurers are required to charge the same rate.
The premium is based on the amount of coverage provided by the policy. The calculation itself is a little convoluted – you can find rate tables and calculations on the Texas Department of Insurance website. To give you an example, for policy coverage of $100,000, the basic rate is $875. For policy coverage of $268,500, the basic rate is $1,808. This is an "all-inclusive" rate, which means the premium includes the escrow officer's fee for searching and examining the title and closing the real estate transaction, as well as the cost of the insurance itself.
There may be discounts available if you simultaneously take out an Owner's Policy and a Loan Policy or if you trade-in a previous policy due to a refinancing, for example. The escrow officer can tell you how much discount you're entitled to; it's usually around $100 when you buy two policies together.