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What Is Title Insurance? Title insurance is protection against loss arising from problems connected to the PAST 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.
Am I Required to Purchase Title Insurance? It is, if you need a mortgage, because all mortgage lenders require such protection for an amount equal to the loan. It lasts until the loan is repaid. As with mortgage insurance, it protects the lender but you pay the premium, which is a single-payment made upfront.
Why Do I Need Title Insurance? The required insurance protects the lender up to the amount of the mortgage, but it doesn’t protect your equity in the property. For that, you need an owner’s title policy for the full value of the home. In many areas, sellers pay for owner policies as part of their obligation to deliver good title to the buyer. In other areas, borrowers must buy it as an add-on to the lender policy. It is advisable to do this because the additional cost above the cost of the lender policy is relatively small.
Doesn't the Lender Policy Indirectly Protect Me? No. Title policies are indemnity policies. They protect against loss, and a lender policy would only cover the lender's loss. Of course, the fact that the insurer issued a policy to the lender indicates that the title has been searched and nothing amiss has been found, but no search is 100% dependable. That is why an insurance policy is issued.
When Does Title Insurance Protection Begin and End? With the exception noted later, title insurance only protects against losses arising from events that occurred prior to the date of the policy. Coverage ends on the day the policy is issued and extends backward in time for an indefinite period. This is in marked contrast to property or life insurance, which protect against losses resulting from events that occur after the policy is issued, for a specified period into the future.
For How Long Is the Property Owner Covered? Indefinitely. The owner’s protection lasts as long as the owner or any heirs have an interest in or any obligation with regard to the property. When they sell, however, the lender will require the purchaser to obtain a new policy. That protects the lender against any liens or other claims against the property that may have arisen since the date of the previous policy. For example, if the contractor you failed to pay for remodeling your kitchen places a lien on your home, you are not protected by your title policy; the lien was placed after the date of the policy. You will probably be required to get the lien removed before you can sell the property. But in the event the lien hasn’t been removed and a search has failed to uncover it, the new lender will be protected by a new policy.
Will Title Insurance Protect Me Against False Claims That Arose After I Purchased the Property? The standard policy does not, which is a weakness. Many events beyond your control can reduce the value of your house after you buy it. Identity theft can result in a new mortgage you know nothing about. A neighbor could build on your land without your knowledge, thereby adversely possessing and possibly eventually taking your land. Or you may suddenly be told that you must correct a zoning violation of the previous owner.
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. In Texas, all title insurance premiums are regulated by the State Board of Insurance of the State of Texas. A title insurance company can only charge the promulgated rate, which is based on (1) the sales price of the property, (2) the loan amount (in the case of a refinance), or (3) the value of the land + the cost of immediately contemplated improvements (in the case of an interim construction loan). Rate Rules allow for discounts under certain conditions.