Title Insurance

What Is Title Insurance?

Owning Your Own Residential Home and/or Commercial Property

Traditionally, real estate (home ownership) has been a family's most valuable asset.  Property ownership laws in Texas have been enacted to protect one's ownership of real estate and the improvements located on the land. Unbeknownst to the buyer, the property owner, the owner's family, and the owner's heirs may have rights or claims in and to the property that you are buying.  In addition, there are other parties who may have an interest in, or lien upon, the property, such as governmental organizations, contractors, lenders, judgment creditors, the Internal Revenue Service, or various other individuals or corporations.  These other parties also have laws to protect their interest. It is important to realize that real estate may be sold to you without the knowledge of the party having a right or claim in and to the property. In addition, you may purchase the real estate without having any knowledge of these rights or claims. In either event, these rights or claims remain attached to the title to the property that you are buying until they are resolved.


Insurance - Protection From Future Loss
In general, a person thinks of insurance in terms of the payment of future loss due to the occurrence of some future event. For instance, a party obtains automobile insurance in order to pay for future loss occasioned by a future accident or for the future potential theft of the car, in order to protect their investment in that vehicle.  Title insurance is a different and unique form of insurance. It provides coverage for future claims or future losses due to title (ownership) defects which are created by some past event (i.e., event prior to the acquisition of the property.) These risks are far less obvious than those protected against by automobile insurance, but can be just as devastating. 


What Is a Title? 

A title is a document that shows legal ownership to a property or asset, such as a title to a vehicle or a title to owning real property, such as a residential home, commercial building or agricultural land.  Titles can be obtained by purchased or inherited as an estate.  It's important that a title search is performed by a title company to ensure that there are no liens, back taxes, or issues with the title that would prevent the sale of the asset.


What Is a Clear Title? 

When an asset or property is owned completely without debt or liens against it, it is called "a free and clear title” or “a clear title”. In other words, a clear title is a title without any kind of impairment, lien, or levy from creditors or other parties that would pose a question as to legal ownership. 

  • An impairment is when an owner of a home does not have a clear title and may not be the sole undisputed owner. Therefore, there may be another party who can make any kind of legal claim to the ownership of the property. In addition, there may be erroneous surveys or unresolved building code violations that will impair the ability to purchase the home with a clear title. Title impairments can also arise in situations of separation, divorce, and heirs not being properly documented.
  • A lien is a claim or legal right against assets that are typically used as collateral to satisfy a debt. A lien could be established by a creditor or a legal judgement. A lien serves to guarantee an underlying obligation, such as the repayment of a loan. If the underlying obligation is not satisfied, the creditor may be able to seize the asset that is the subject of the lien. There are many types of liens that are used to secure assets.
  • A levy is the legal seizure of property to satisfy an outstanding debt. Levies are the legal means by which a taxing authority or a bank can seize property for the payment of a debt. A levy is different from a lien because a levy takes the property to satisfy the tax debt, whereas a lien is a claim used as security for the tax debt.

A clear title is necessary for any real estate transaction because it firmly establishes who is the property owner.  Title companies must do a title search to check for claims or liens of any kind against a title before it can be deemed clear. 


How a Clear Title Works 

A clear title shows whether there are any outstanding financial responsibilities attached to the property from the current or previous owners, and is necessary to demonstrate that an owner has the right to sell the property.  The sale of a property can be disputed if legal ownership is not represented through a clear title.

As mentioned, the presence of liens can create a cloud on title, which is when a claim or an unreleased lien invalidates or impairs the owner’s title to the property. For example, the current owner may still owe payments on an outstanding mortgage or owe contractors for refurbishment work they performed on the property. The title would not be clear, and the new owner would then be held responsible for resolving those liens.

Once a title is cleared, the deed can be registered in the homeowner’s name. The deed is the legal document showing who owns a property. If someone is buying a home, the title must be clear before the new owner’s name can be put on the deed.

It’s important to note that a property could potentially be sold while liens are active. The law doesn’t require liens to be removed before the sale of a property. However, the buyer wouldn’t be able to get a mortgage or home equity loan, because the bank would research and discover the past liens, which would have to be cleared for the financing to go through.


Examples of Clear Title Issues 

There are many reasons why a title search might come back listing the title as unclear. Just because someone currently lives in a home doesn’t mean that the home has been titled or vested to that person. When it comes time to sell the home, the buyer can run into problems with the title, meaning it’s unclear who owns the property.

  

Examples of Clear Title Issues 

There are many reasons why a title search might come back listing the title as unclear. Just because someone currently lives in a home doesn’t mean that the home has been titled or vested to that person. When it comes time to sell the home, the buyer can run into problems with the title, meaning it’s unclear who owns the property.

  • Heirs - Complications can arise with older properties where the heirs of a prior owner may still have some claim to the real estate. For instance, a prior owner may have granted a portion of a property to an heir who never took an active role as an owner. Said heir’s rights as a partial owner may have passed on to his or her descendants, who might not be aware of the circumstance.
  • Title problems can also arise if the heir to the property never filed the deed with the county clerk’s office to transfer ownership. When the heir goes to sell the property, title problems will occur, as the deed would still show the family member who willed the property to the heir.
  • Fraud - Possession of a clear title is also important to prevent instances of fraud. It’s possible that a false deed may have been entered into the public record. A fraudster might attempt to use a false deed to engage in the illegal sale of a property.
  • Separation or Divorce - Title problems can occur in situations in which a couple separated but never went through divorce proceedings. If the couple owned the home jointly and one person moved out following the separation, they would still both own the house without a divorce. As a result, when the person living in the home goes to sell the house, title problems would arise because two people would be listed on the deed.
  • A Trust - Ownership might have been transferred to a trust or some other body that has a legal claim to the property. This is why title searches are performed, in order to identify such issues before a potential buyer has committed funds to acquire a property.


What Is a Title Search? 

A title search is an examination of public records to determine and confirm a property's legal ownership, and find out what claims or liens are on the property. A clean title is required for any real estate transaction to go through properly.


How Title Searches Work 

A title search is usually performed by a title company, often on behalf of one or more prospective buyers who may be interested in making an offer on the property. The process may also be initiated by a lender or other entity that wants to verify ownership of the property, and determine what claims or judgments against the property may exist before approving a loan or other credit that uses that property as collateral.

While it is possible for a prospective buyer or another individual to conduct a title search on their own, this is not recommended. Legal documents can be confusing, and navigating records at the courthouse can be a tricky process. It would be easy for an inexperienced person to overlook something important.


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