If you plan on buying real estate at some point in your life, you will most likely have to buy a title insurance policy. While Texas law doesn’t require you to have title insurance to buy real estate, lenders will usually insist that you purchase a title insurance policy before giving you a loan. To those who aren’t experienced real estate purchasers, sellers and professionals, phrases like “title insurance,” “title search” and “cloud on title” can seem confusing, mysterious, and even intimidating. So just what is title insurance, and why do you need it to buy your dream home?
To understand what title insurance is, first you need to know what title is, which can easily be explained by a real estate or texas title attorney. “Title” basically means legal rights in property, including the rights to own, use, and sell the property. If someone tells you “I have title to this property,” what they are really telling you is “I own this property.”
Title insurance protects homeowners and lenders from losing money due to problems affecting title to real estate. The goal is to make sure that the property has “marketable title,” and to insure that title. Normally a lender has a title insurance policy, and the homeowner has a separate title insurance policy. The lender’s policy helps to protect the lender from the risk of losing the money they loan to someone to buy real estate due to title problems. The homeowner’s policy helps to protect the homeowner by insuring the full value of the real estate against title problems. The title insurance company agrees to take on the expense of defending the title to the property if someone challenges the title due to a title problem, or to compensate the insured in case the property is lost due to a title problem. But what types of issues do title insurance policies protect lenders and homeowners from?
There are a number of problems that affect title, often referred to as title defects, encumbrances, liens, or burdens. These problems often make it unclear exactly who owns the property, or what interest in the property they own, thus muddying the waters and creating a “cloud on title.” A few common title defects include unpaid mortgages, unpaid taxes, and unknown heirs of a deceased previous owner. Keep in mind, that almost all of these can be resolved with the assistance of a title attorney or lien attorney.
For example, say a seller approaches you and offers to sell you his land. The seller claims he owns 100% of the land, and that there is no mortgage, unpaid taxes, etc. on the land. Now say it turns out the seller was dishonest and, in fact, there are several years of unpaid property taxes on the land. The unpaid taxes constitute a lien on the land, and that lien impairs marketable title.
You go to a lender to get a loan to buy the land, and the lender insists (wisely) that you get a title insurance policy. You go to a title insurance company and ask for a policy. The title insurance company researches the property’s history to determine if there are any title defects, liens, or anything else affecting title. Normally, a title insurance company would easily find a title issue such as a tax lien, and would either refuse to insure title or refuse to cover the tax lien with the policy. Thus, you would likely have a difficult time getting a loan to buy the property, or would have to take care of the property taxes before getting a loan.
However, say the title insurance company somehow did not find the tax lien, and went ahead and insured title to the property, allowing you to get the loan. You take the loan and buy the property from the seller, completely unaware of the tax lien. Then, the local government takes you to court over the tax lien, threatening to take and foreclose on the property if the taxes aren’t paid. You would be protected due to your title insurance policy, and the title insurance company would have to take care of the tax lien instead of you paying it out of your own pocket or having to hire your own title attorney to try to clear up the liens.
Title insurance only protects homeowners from issues that arose before the homeowner purchased the property. Thus, if an issue arises after you buy a property, your title insurance policy will not cover the title problem, and you will not be insured against it. This makes sense, as the title insurance company cannot control what you do with the property after you have bought it, and thus will not insure you against any title problems you create, yourself.
When you apply for a title insurance policy, the title insurance company will carry out a “title search” of the property. A title search is a thorough inspection of all of the available public records concerning the property and the seller of the property. Title examiners research the county records searching for deeds, mortgages, tax liens, judgments, and anything else that might affect title.
Ideally, what title insurance companies (and buyers) want to see is a clear “chain of title” leading to the seller. The chain of title is the ownership history of the property. Thus, a good, clear chain of title will show something like this: Joe originally owned the property. Joe sold the property to Mary, who sold the property to Bob, who sold the property to Mike, and Mike now wants to sell the property to the buyer.
A title defect arises, however, if the there is not a clear chain of title. For example: Suppose Joe originally owned the property. Joe sold the property to Mary, but no deed is found conveying the property from Mary to anyone else. Yet later there is a deed from Bob selling the property to Mike, and Mike now wants to sell the property to the buyer. Since the title examiner can find no recorded deed conveying the property from Mary to Bob, there is a “break” in the chain of title, and it is unclear who exactly owns the property. There may have been a deed from Mary to Bob that wasn’t recorded, for example, or the deed from Bob to Mike may have been fraudulent and illegal (if, for example, Bob never owned the property and had no right to sell it to Mike). This is a title defect that renders title unmarketable, and will either have to be “cured” (by, for example, finding the previously unrecorded deed where Mary sold the property to Bob if there was one and recording it, or taking whatever legal steps are necessary to make title marketable).
Each county maintains public records containing deeds, contracts, agreements, all types of liens, and more. These records are typically organized in a “grantor/grantee index” by last name. A “grantor” is the person granting or conveying something, while the grantee is the person receiving something. Thus, in a deed the grantor is the seller, and the grantee is the buyer. The grantor/grantee index should ideally contain the complete history of the property, organized by the last name of all of the people who have bought and sold or had any interest in the property.
In a title search, a title examiner begins with the most recent known deed (typically the deed which conveyed the property to the person who now wants to sell the property). The title examiner identifies the grantor, and searches back in the records to find who sold the property to the grantor, and who sold the property to that person, and so on as far back as possible in order to find out if there is a clear chain of title. Mortgages, judgments, and other documents affecting title are also organized in the grantor/grantee index by last name, and should be discovered by the title examiner if they are filed correctly and the search is carried out correctly. Once the title examiner has searched back through the records as far as possible, they search forward in the records by the same names. This helps ensure that the person selling the property, for example, hasn’t already sold it to someone else, and that all liens against the property have been released and won’t create a cloud on title.
As mentioned before, sometimes records that should be recorded in the grantor/grantee index are not, or are recorded improperly. While Texas law requires that virtually all conveyances of land be recorded in the county records, not everyone follows the law. Sometimes people commit fraud in buying or selling land. Sometimes people don’t know that they are supposed to record a deed, or simply forget to. Sometimes these records are recorded under the wrong name due to a typo or some other type of mistake. In any case, unrecorded or improperly recorded documents can create a cloud on title that makes title unmarketable, and expose the buyer, seller, and lender to risk. Hence, title insurance helps to give confidence and protection to the parties of real estate transactions that such issues either won’t be deal breakers or will be resolved (“cured”) before closing.
Before you purchase your next property, call the real estate and title attorneys at The Farah Law Firm, PC, we will happily guide you through the property purchase process and lien verification or clearing process.