Frequently Asked Questions.

A title insurance policy is a specialized form of insurance coverage that protects owners of real property. In some respects, title coverage is similar to automobile insurance, in that it provides you with protection from losses that may occur in the future (like someone rear-ending your vehicle on the Tollway or stealing it for parts). But title insurance is different, in that it provides coverage for future claims or losses due to defects in title to your real property created by a past event—something that may have occurred prior to your purchase of the property, but is unknown at that time. These risks are far less obvious than the risks typically covered by automobile insurance. But when you consider the investment that most people make in their homes, it’s easy to see that they can be far more costly and devastating.

Title insurance exists to protect the investment made by homeowners in their real property, which is typically a family or an individual's most valuable asset. When you purchase a piece of real property, you will find that the owner, the owner's family, and the owner's heirs may all have rights or claims to that piece of property. There may be other entities with an interest in the property as well, such as building contractors, lenders, judgment creditors, taxing authorities (like the IRS), or various other individuals or corporations. The real property that you are purchasing may be sold to you without knowledge that one or more of these parties has a right or claim to that property. These rights and claims remain attached to the title on the property until they are extinguished. But sometimes, they don’t come to light until after the date of purchase by an unsuspecting homebuyer.

Whenever a lender commits to loan money on a piece of real property, it takes certain steps to establish the security of its prospective investment. The security of a mortgage loan is protected by conducting a due diligence investigation of both the purchaser/borrower and of the property itself. With respect to the property, a significant part of the lender’s due diligence involves determining the status or quality of title to the property. The lender does this by obtaining a loan policy of title insurance. The loan title policy is purchased to protect the lender’s interest from loss due to unknown title defects or certain kinds of matters (such as unpaid property taxes or mechanics liens, for example) that may exist but remain unknown at the time of the loan.

The loan title policy taken out by the lender only protects the lender's interest. It does not cover claims made by the purchaser/borrower. That is why the purchaser/borrower typically obtains an owner's title policy, which protects his or her ownership interest from loss due to title defects or other related issues. The owner’s title policy can be, and often is, issued at the same time as the lender’s policy.

As an example, let’s consider a purchase of real property in the amount of $200,000. The purchaser makes a down payment of $40,000, which is the amount of their equity in the property. They then take out a mortgage loan for $160,000. This is the amount that the lender seeks to insure, as it represents the extent of their investment in the transaction. In such a scenario, the purchaser’s equity of $40,000.00 is not protected.

So what would happen if some other matter arises affecting the past ownership of the property? The title insurance company would only defend and protect the interest of the lender. The owner/borrower would have to assume the financial burden of the legal defense. And if the legal defense is not successful, the result could be a total loss of title. In such a scenario, the title insurance company pays the lender's loss, and perhaps takes an assignment of the owner/borrower’s remaining debt. But the owner/borrower loses the down payment and any other equity that may have accumulated, as well as the property itself. And the balance of the note must still be paid.

Title insurance is issued after careful examination of public records pertaining to the property and/or its owners. But even the most thorough search by the best and most experienced title examiners cannot guarantee that there are no title hazards present. This is because there are many different kinds of potential title problems that cannot be disclosed or discovered through search of public records. Examples would include:

• False impersonation of the true owner of the property
• Forged deeds, releases or wills
• Undisclosed or missing heirs
• Instruments executed under invalid or expired power of attorney
• Mistakes in recording legal documents
• Misinterpretations of wills
• Deeds by persons of unsound mind
• Deeds by minors
• Deeds by persons supposedly single, but in fact married
• Liens for unpaid estate, inheritance, income or gift taxes
• Fraud

Title insurance will typically pay for the defense of any lawsuit attacking or challenging the status of title as insured and/or reimburse you for your losses cause by the title defect as provided in the owner’s title policy. The title company will either clear up covered title problems or pay the insured's losses. For a one-time premium, an owner's title insurance policy remains in effect for as long as you or your heirs retain an interest in the property, or have any obligation under warranty in any conveyance of the land.

The Texas Department of Insurance regulates all title premiums in the state of Texas. They do offer a credit on a refinance transaction for the loan policy premium if the last loan policy issued was seven years or less, regardless of the title company that issued the policy.
A credit is issued as follows:

• 40% for a loan policy less than 2 years old
• 35% for a loan policy greater than 2, but less than 3years old
• 30% for a loan policy greater than 3, but less than 4years old
• 25% for a loan policy greater than 4, but less than 5years old
• 20% for a loan policy greater than 5, but less than 6years old
• 15% for a loan policy greater than 6, but less than 7years old

Yes, in Texas it has been standard for the Seller to pay for the Buyer's owner's title policy unless negotiated otherwise.

In Texas, property taxes for the current year are due and payable on October 1, and are delinquent on February 1 of the following year. If you close your transaction on or after October 1, and want the policy to insure that taxes for the current year are paid, then the title company must collect the taxes and pay them to the different taxing authorities. Almost all lenders will require taxes to be paid at closing if the closing occurs after October 1. Regardless of whether taxes are paid, they will be prorated through the date of the closing, with each party being charged for taxes based on the portion of the year for which they own the property in question.

The Texas Constitution and various statutory provisions establish and define the homestead rights in Texas. The homestead rights protect a family's homestead from claims of creditors, both secured or unsecured, with the following exceptions.

A forced sale of a homestead can occur if the debt arises from either:

• Funds borrowed to finance the initial purchase price of the homestead (e.g., a mortgage).
• Funds borrowed to finance work and materials used in construction of permanent improvements on the homestead (if contracted for by both spouses before commencement of work and subsequently perfected with a validly-filed mechanic's lien)
• Taxes due on the homestead; including a federal tax lien (provided that the tax debt is the debt of both spouses).
• Home equity or reverse mortgage loans.
• An owelty of partition lien created upon partition of the property (this is sometimes done in connection with a divorce proceeding).
• Certain assessments levied by property owners’ associations (HOAs).

Forced sale of a homestead cannot occur if the debt in question arises from typical consumer transactions. Put another way, automobile finance companies, issuers or credit cards, or holders of unsecured debt typically cannot foreclose on your homestead. This would also apply to the holders of most judgment liens.

Texas Homestead law provides that the homestead of a family, or of a single adult person, is protected from forced sale for the payment of all debts, except for those specifically authorized under the constitution (see above).

Since January 1, 1998, Texans with sufficient equity in their homestead property have been allowed to use that equity to secure a loan, the proceeds of which may be used for any purpose desired by the homeowner. In most cases, Texans using their personal residence property as security for a home equity loan are able to claim the interest paid on the loan as a deduction from taxable income. If the loan is not repaid, the homestead property may be subject to foreclosure.

For many years, Texans were not allowed to borrow against the equity in their homesteads, largely due to concern that irresponsible borrowing or lending might cause families to lose their homestead properties to foreclosure. In order to protect against such losses, the laws authorizing home equity loans in Texas included a number of safeguards in the form of restrictions on both the borrowers and the lenders. These include: •Voluntary consent to the lien by all owners and their spouses.

• Total borrowing against a homestead property may not exceed 80% of fair market value.
• Loans are non-recourse to the borrower unless obtained through fraud.
• Judicial foreclosure process is required.
• Only one second-lien equity may exist on a property at anytime.
• Lender may not require any additional security be pledged.
• Lender may not accelerate the debt or foreclose simply because fair market value of the property has declined.
• The loan must be repaid in equal monthly installments; no balloon payments.
• No prepayment penalty is allowed if the loan is paid off early.
• In most cases, property zoned for agricultural use may not be used as collateral for a home equity loan.
• Only qualified lenders will be allowed to make Home Equity loans.
• Home equity loans may be closed only in the office of the lender, a title company, or an attorney.
• Borrowers may not close a home equity loan until the later of 5 days after receiving a prescribed disclosure notice from the lender, or 5 days after making application.
• Borrower may rescind the transaction within 3 days after closing without cost.
• Total fees associated with the loan may not exceed 3% of the loan amount.

Obviously, this is a very general discussion of the restrictions and requirements relating to home equity loans. Certain restrictions may not apply to every loan. If you are considering a home equity loan, you should obtain professional advice before doing so.

A reverse mortgage is a financial tool that allows older homeowners to draw on the equity in their homes as a means of paying for various other living expenses. In recent years, a growing number of Texas residents have opted for reverse mortgages as a way to finance their retirement. A reverse mortgage is, as the name might suggest, much like a typical mortgage loan in reverse. Instead of making regular monthly payments to the lender, the owner of a property may receive monthly payments from the lender by drawing against the equity in his or her homestead property. With a regular mortgage, one’s balance or payoff is reduced with each monthly payment. With a reverse mortgage, the balance or payoff grows larger with each monthly advance of funds to the homeowner and/or the application of related fees. When the homeowner leaves the home (either because they choose to sell it, or because they have passed away), the balance becomes due and payable.

Reverse mortgages are much like Texas home equity loans, in that there are a great many safeguards that protect property owners. These include:

• Voluntary consent to the lien by all owners and their spouses.
• Loans are non-recourse to the borrower unless obtained through fraud.
• Advances are provided based on the amount of equity the borrower has in his or her home.
• Lender may not require repayment of principal or interest until all borrowers have died; the homestead property is sold or otherwise conveyed; all borrowers cease to occupy the property for more than 12 consecutive months without lender approval; or default on certain obligations in the deed of trust.
• Foreclosure may commence only after sufficient notice and an opportunity to cure.

The cost and fees associated with a reverse mortgage loan are typically higher than for a regular mortgage or a home equity loan. In addition, borrowers are required to go through counseling regarding the advisability of a reverse mortgage loan. Reverse mortgages are not a good idea for everyone. Homeowners considering such a strategy should consult with their CPA or financial advisor, and then speak with a lender who understands reverse mortgages.

Upon purchasing a home, simply contact the appraisal district for the county in which the home is located, and request the necessary forms for declaring your homestead.

• Dallas County (214) 631-0910
• Collin County (972) 578-5200
• Denton County (972) 434-2602 Metro
• Collin County (817) 284-3925

After you move into your new home, you may receive solicitations in the mail offering to file homestead paperwork for you in exchange for a fee. It is not necessary to pay anyone to perform this service for you. The process is simple, and there is no charge to declare a homestead.

Your closing will take place at Chicago Title Insurance Company, which will act as escrow agent and title insurer. As is set forth in the contract for purchase of your real property, the title insurance agent may hold the earnest money, prepare the closing statement, and generally coordinate with all of the various entities involved in the closing. This includes collecting invoices and written information from the mortgage lender, insurance agent, surveyor, attorneys for the parties, the tax search firm, inspection companies, and the title underwriter. In addition to acting as escrow agent, the title company will research the title to your home and issue a commitment for the title insurance reflecting the ownership, restrictions, easements, liens and other exceptions that will have an effect on the property.

At the time of closing, the title company will allocate the fees between the purchaser and seller in accordance with the contract, lender's instructions and local custom. The closing will take about forty-five to sixty minutes; however, occasionally there are last minute delays from one of the many servicing companies, especially at the end of the month.

After the buyer and the seller have signed the necessary documents, the title company will return the mortgage papers and proposed title policies to the lender for review and funding of the loan. Upon receipt of the buyer's funds and the loan amount, the title company will disburse all proceeds as shown on the closing statement and cause the deed and deed of trust to be recorded with the county clerk. Title insurance regulations require funds to be in the form of either a cashier's or certified check payable to the title company or transferred to the title company's bank via wire transfer.

The policy forms, premium rates, rules, and procedures for issuance of title insurance are all promulgated and controlled by the Texas Department of Insurance, in accordance with Chapter Nine of the Texas Insurance Code. Because title insurance rates are promulgated by the State, this means that all title companies charge exactly the same premium rates for a given piece of property. Please see our title insurance calculator for more information.