What does the Title Insurance Company do?
Title insurance companies in Texas have two primary functions: holding and disbursing funds from escrow accounts, and issuing an insurance policy covering ownership of the property.
Maintaining escrow accounts simply means that the funds relating to each transaction are held in trust by a disinterested third party, the title company. The title company is then responsible for using the funds for settlement and closing costs only upon approval of the payments by all parties involved. It alsoprotects buyers who have paid earnest money as part of a sales contract, as that earnest money is held by the title company until closing, or released back to the appropriate party in the event that the sale does not close. For lenders, the escrow function is especially important, to be sure that any necessary payoffs are made.
The second primary function is to issue an insurance policy covering ownership of the property. In order to do this, title companies find and fix any issues affecting title to the property. This means searching into the history of the property to determine whether there is anything at all which could impact an ownership claim down the road. Some of the things which the title company searches for are existing liens or claims against the property, easements, encroachments, and past issues with title. All of this is to make sure, for the buyer and lender,that no exceptions to the buyer’s title exist which are not fully disclosed.
After closing, the title company distributes funds to each party as necessary. Then it properly records the deeds, lien releases, and other related legal documents and instruments with the appropriate county offices. Recording these documents makes it “official.” If the buyer decides to, for example, sell the property, or take out a home equity loan using the property as collateral, it is imperative that the documents have been properly recorded.
What is Title Insurance?
Title insurance protects both the new owner and/or the lender against future claims or disputes regarding the ownership of the property. Title insurance is generally purchased as part of the closing, either by the buyer or seller, depending on the contract. Generally, two separate policies are issued: a Lender’s Policy, which protects the new lender and their lien on the property, and an Owner’s Policy, which protects the new owner against certain claims. When you buy title insurance, you are literally insuring the title to your property, protecting you against claims against your property later down the road.
Basic rates for Title Insurance are set by the Texas Department of Insurance, and are generally based on the sales price.
Why They Should Have Gotten Title Insurance
Many situations could arise which could be either alleviated or avoided altogether if a title company closed the transaction.
A young couple finds the perfect starter home, “for sale by owner.” They finance the purchase through the seller, so no commercial lender is involved. The “closing” consists of the seller signing over a deed. Five years later, that young couple is ready to move into a bigger home, but when they go to sell their beautiful starter home, they discover that the original owner’s former spouse still has title to the home. If they had used a title company in the first place, the title company would have informed them before they bought the home, saving them time, money, and significant hassle.
A growing family buys a comfortable home with a large yard. A few years later, they add on a wrap-around porch. Soon after, the local power company needs to access underground cables. The power company has an easement along one side of the property, straight through the beautiful new porch. The family had not used a title company when they purchased their home, and so were not aware of the easement. Once the power company has torn up the porch to get to the underground cables, the family has to pay for significant renovations to the porch, repairing it and re-designing it to avoid the easement. Using a title company would have spared that family the cost and hassle.
An investor finds a house at below-market price. The investor pays cash to the seller, and files the deed with the appropriate county offices himself. The investor renovates the kitchen, adds new carpet, repaints, and puts the house back on the market, attempting to flip it for profit. While it’s on the market, the investor receives a payment demand from a contractor. The contractor has a mechanic’s lien on the property, from work done by the previous owner but not fully paid off. Since the investor didn’t use a title company, he didn’t know about the lien. Now the investor is saddled with the debts of the previous owner. This investor learned the hard way about the vital role played by title companies.
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