It is not unusual for buyers, sellers, and borrowers closing at our boutique title company in the Houston Heights to ask why they are paying for a title insurance policy and what title insurance covers. Like any other insurance, title insurance provides protection when something goes wrong, with certain exceptions. In the case of title insurance, it protects the policyholder, the buyer or lender, against loss if a “covered defect” is found in the chain of title to your property. Covered defects are things such as 1) errors in the information contained in deeds and mortgage that have been filed in the public records; 2) liens or claims against the property (or a prior owner if the claim legally attaches to the property) that have not been paid or released; 3) claims of ownership by persons that occur prior to the transfer of title to the policyholder; and 4) invalid transfers of title, such as by someone who did not own the property or was not competent to transfer title.
It is important to note that title insurance does not cover all issues regarding the property. Title policies will take exception to (not cover) things such as 1) limitations on the use of the property (whether a property can be used as a business or residence); 2) easements, rights of way and other legal obligations of the property that are filed in the public records; 3) restrictive covenants (deed restrictions).
Is Title Insurance required?
Title insurance is not required to purchase a piece of property. However, lenders typically do require a title policy to be issued in conjunction with their loan in order to protect them in case of a title defect. Defects in the title can cost thousands, even hundreds of thousands of dollars to fix, and can even result in the title being divested (taken away) from the purchaser of property or lenders losing the property as security for their loan. The purchase of a home is typically the largest investment most people make, so while it is optional for a purchaser to obtain a title insurance policy, protecting one’s investment needs to be considered.
How Much Does It Cost?
Rates for insurance charged by title companies in Texas are set by the Texas Department of Insurance and is based on the sales price of the property or the dollar amount of the coverage being issued. Title insurance rates range from 0.9% to less than 0.5% of the policy coverage amount (purchase price or loan amount), and owner policies are valid as long as the policyholder owns the property. Substantial discounts are available when an owner title policy is being issued at the same time as a lender title policy covering the same property. Additionally, if a property is being refinanced by the owner and only a lender’s policy is being issued, policy premiums are discounted based on the length of time from the loan being refinanced and the payoff amount on the loan being refinanced.
While title insurance is not required, one would be hard-pressed to find a real estate professional that would recommend against obtaining title insurance when purchasing a property. The cost of a title insurance policy covering the investment in the property is relatively low (especially considering discounts that are applied if a loan is being obtained to purchase the property) and is a one-time charge for a policy that is valid as long as the property is owned by the insured named in the policy. Additionally, the party responsible for paying the cost of title insurance is negotiable, so it is not unusual for the Seller to pay the cost of the buyer’s owner title policy.