In this month’s Closer’s Corner we share information about title insurance. It is very important to the transaction and often quite misunderstood.
What is title insurance?
Title insurance insures against financial loss caused by defects in title to real estate. Title insurance companies defend against lawsuits attacking the title, or in the case of a covered loss, reimburse the insured up to the policy limit.
What kinds of defects does title insurance protect you from?
It protects the insured (i.e. the buyer or lender) against loss due to title defects, liens, or other similar matters. Title insurance protects the buyer from claims of ownership by other parties. It protects the buyer against losses from certain problems that arose before they bought the property and it offers coverage and assistance for the buyer post-closing if covered issues arise.
How long does it last?
An owner’s policy lasts as long as the buyer or their heirs own the land. It could even provide warrantor’s coverage after the buyer no longer owns the property, depending on the policy provisions. The premium is paid only once when the policy is purchased.
What’s the difference between a title commitment and a title policy?
The title commitment comes before closing and affords the buyer a preview of how their title policy will be issued. The title policy is issued after closing once we’ve funded and recorded all documents. The commitment says that a title company is willing to issue title insurance under certain conditions and if the seller fixes certain problems. The policy provides the actual coverage for the property.
What does the title commitment do?
The title commitment shows that upon closing and funding the title company will issue a policy and the title commitment gives the buyer the opportunity to review exceptions and exclusions to coverage that will be itemized in the title policy.
A buyer should always review their title commitment in detail prior to closing so that they are aware of the limitations and encumbrances that exist on a property. Exceptions and exclusions are items not covered by the policy.
What types of polices are there?
There are two types of policies: Owner’s Title Policy (“OTP”) and Lender’s Title Policy.
The owner’s policy protects a buyer against losses from some ownership problems that arose before they bought the property, but that were not known at the time of closing. For example, a buyer could lose title to their property due to fraud, errors or omissions in previous deeds, or forgery of a previous deed. The owner’s policy protects the buyer from the covered risks listed in the policy. The loan policy is issued to the mortgage lender. It protects the lender’s interest in the property until the borrower pays off the mortgage.
Why does a buyer need a loan policy?
Often times we are asked if a buyer can waive getting an Owner’s Title Policy and that is an incredibly risky thing for a buyer to want to do. A buyer that does not get title insurance is 100% on their own for any issues that later arise from the purchase of the property and they wouldn’t have a title policy to help resolve the title matters. Additionally their lender will require a loan policy as a condition of the mortgage so waiving the OTP does not actually result in a significant cost savings to the buyer. When an OTP and loan policy are purchased at the same time, the loan policy is issued at a discounted price of $100. If a buyer decides not to purchase an owner’s policy, they would still pay full price for the loan policy (and they would receive no credit from the seller if the seller had agreed to pay for the OTP per contract).
What if my home increases in value? Am I still covered?
The buyer is covered for the value of the initial sales price.
If they add improvements, or if the home increases in value over time, they can buy an increased value endorsement to cover the increased property’s value.
What is a title defect?
A title defect is anything that can cause a title to be considered invalid or defective in some way.
Some examples are:
Lien issues can also cause title defects.
Some examples of lien issues are:
What doesn’t a title policy cover?
A title policy won’t cover defects that are created after the policy is issued. It also does not cover defects created by the insured. Nor does a policy cover municipal issues such as zoning or city permitting requirements.
What is a good way to explain title insurance to customers?
Did you know that TNT supplies a specific marketing piece addressing this topic in both English and Spanish languages that is available to you for buyer and seller presentations? Access TNT’s “What is Title Insurance?” flyer and many other Buying, Selling, and Closing themed marketing pieces through the TNT Website at: www.texasnationaltitle.com/austin/tools/brochures/buy-selling-closing
Our closing teams at Texas National Title are all well versed in the complexities associated with closings. We are the experts that you need and the partners that you can trust in all things escrow and title! Please do not hesitate to contact us with any additional questions that you have.