Understanding Title Insurance

Title companies are nothing new in the real estate industry. But do you understand their function and how vital they are to you?

Title insurance is the inverse of other insurance coverages. Instead of assuming risk, title insurance companies eliminate the risk with a one-time payment, assuring the homeowner maintains the title as owner of the property. Title companies defend homeowners against any lawsuits attacking the title or if there is a covered loss, they will compensate them for the amount of the policy.

Title insurance is essential to the real estate and lending industries. Without it, you couldn’t feel confident you truly own the homes—or borrow against their collateral.

Ensuring ownership

Title insurance is different than other types of insurance.

Most consumer insurance policies—think car or homeowners insurance—assume risk. A policy gives you money if an adverse event qualifies for reimbursement.

In contrast, title insurance eliminates risk. For a one-time fee, you get an assurance that title will not be taken away from you once you own the property. That’s because the title company will defend against any lawsuits attacking title, or if there is a covered loss (such as the title being vested in an owner different from the one stated on the policy), the title company will compensate you for the amount of the policy.

Title companies do this by searching property history to ensure there are no unpaid debts, liens, or heirs that could contest the buyer’s ownership. Companies also resolve any fraud or forgery found in the chain of title before the buyer purchases the property.

Discovering property history

How can title companies ensure no valid claims can be made against the buyer’s ownership?

To be licensed in Texas, title companies must own or lease a title plant: special software or a filing system to search geographically indexed title records. Escrow officers search the records using a property’s legal description and review a run sheet of property information. Officers also search for the buyer’s and seller’s names to ensure there are no tax or judgment liens filed.

In the rare event that a county does not have a local title agent with geographically indexed title records, title professionals have to go to the county courthouse and manually do a grantor-grantee search. That’s tracing the property history backward one sale at a time.

Most properties need some kind of correction, or curative work, to their title information. It may be something simple like correcting a prior instrument with an error in the legal description, ordering proof of a mortgage payoff, or ordering homeowners or property association information. If the problem is small, the title companies can handle it themselves with the seller’s permission.

The escrow officer’s work depends on the property. If a property has changed hands often and everything’s up to date, it could close in as little as three days.

Working on a property that’s been in the same family for generations is not as easy as you might think, though. Title agents need to trace the property back through probate and wills to determine heirship. That may take 30 to 45 days.

Officers must also do significant work when a deceased homeowner’s estate isn’t organized, such as if there is no will. They have to make sure there are no unknown heirs. Sometimes people sign affidavits and they forget to include someone, or they don’t think an estranged son is entitled to the property. They may search obituaries or just Google these people.

Complex issues, such as untangling IRS tax or judgment liens, bankruptcies, or imminent foreclosures, may require involving attorneys. Title companies can work to get lien releases against the property, but these do not release the debtor from any personal liability on the debt if a balance remains.

Why title matters

In theory, you can buy and sell a property without title insurance. If you pay cash and all of the paperwork is clean and in order, it can be done. But doing so comes with risks.

For the vast majority of transactions, title insurance builds the trust required to conduct business. Buyers want to know they truly own the property.

Homeowners take out second mortgages and borrow against their homes to pay for a child’s education, for example. Clean title records allow this to happen.

Title insurance is the product title companies offer, but title companies also offer other important services during the real estate transaction. They can collect the funds, liens, and bills, and then handle the final exchange between buyer and seller, and then  record the transaction and make sure everything’s in the deed and that ownership passes.

Title companies handle the actual closing and amend all of the records so everything’s up to date and accurate. If title companies disappeared tomorrow, the property records could be in disarray within five years. “We are constantly cleaning them up and correcting legal documents, sometimes requiring the prior owners’ signatures. And if you wait a few years, you may have to track down the executor of the owner’s estate.”