Harbaugh Real Estate

Demystifying Title Insurance in Residential Real Estate

By Lee Harbaugh

If you're involved in buying or selling residential real estate in Texas, the concept of title insurance might feel a bit daunting. However, a clear understanding of what title insurance is and why it's essential can go a long way in ensuring your real estate transactions are secure and your property well-protected. In this blog post, we'll unravel the intricacies of title insurance, specifically in the context of residential real estate in Texas.

a single blue house on a sunny day

What is Title Insurance?

Title insurance is a type of insurance that protects the holder (i.e. the property owner) from financial loss tied to defects in the title to a property. This includes losses from claims for past occurrences. If you are not familiar with what title is, title refers to the legal right to own, possess, use, control, and dispose of property.

In most cases, two types of title insurance policies are issued: a Lender's policy and an Owner's policy. A Lender's policy protects the mortgage lender's investment in the property, while an Owner's policy protects the property owner against title defects that may arise after the purchase.

Why is Title Insurance Essential?

Title insurance offers protection against various issues, such as undisclosed heirs, forgery, errors in the public records, liens against the property, and more. These are collectively referred to as 'title defects.' Without title insurance, any financial loss resulting from such defects would be the responsibility of the property owner.

For example, let's say that John buys a house, and after living there for 10 years someone comes forward and claims that the property really belongs to them because their grandfather used to own the property, and they are the sole heir to the estate, and the house should never have been sold when the grandfather passed. If the courts uphold this claim, John could suddenly find himself without a home, and what's more, he wouldn't receive any compensation for turning the property over to this rightful owner. Title insurance covers this situation by making John whole in a case like this.

Title Insurance in Texas

In Texas, the Texas Department of Insurance (TDI) regulates the title insurance industry, including setting the rates for title insurance policies. Unlike in other states, title insurance rates in Texas are uniform across the industry.

Another distinct feature of title insurance in Texas is the one-time premium. Buyers typically pay for the policy at the closing, and the policy remains in effect as long as the insured or their heirs own the property. The premium cost is directly proportional to the value of the property.

The Title Search Process in Texas

Before a title insurance policy is issued, a title search is performed to identify any title defects that may exist. This search includes a review of land records going back many years. Any discovered defects are then either resolved before closing or listed as exceptions in the title insurance policy.

Who Pays for Title Insurance in Texas?

In Texas, either the seller or buyer can pay for the Owner's policy. The buyer almost always pays for the Lender's policy. The Owner's policy premium is one of the commonly negotiated items during a real estate transaction.

Choosing a Title Company in Texas

When selecting a title company, look for a reputable firm with extensive experience in handling title insurance. Since the TDI regulates title insurance rates, there should be no price difference between companies. Instead, your decision should be based on the quality of service and the company's expertise in resolving title defects and facilitating smooth closings. Most times your Realtor will have title companies that they regularly work with and can recommend.

In Conclusion

Title insurance plays a crucial role in protecting your investment in residential real estate. It offers a safety net against any potential financial loss due to title defects. While the nuances of title insurance can be complicated, armed with the right knowledge and a reliable title company by your side, you can navigate the Texas real estate landscape with confidence and peace of mind. Remember, while this article provides a general overview of title insurance in Texas, it's always wise to consult with a knowledgeable real estate attorney or professional to understand how these concepts apply to your specific situation.