Q. Why do you need title insurance?
A. When a lender commits to loan money on a piece of property, they have gone to great lengths to insure the security of the investment. The security of the mortgage is protected by performing a due diligence investigation of first, the purchaser / borrower and second, the property. A significant part of the property due diligence is insuring the quality of the title to the property. The lender does this by obtaining a loan policy of title insurance.

THE LOAN POLICY DOES NOT PROTECT THE PURCHASER / BORROWER

The loan policy protects the lender against loss due to unknown title defects. It also protects the lender's interest from certain matters which may exist but not to be known at the time of sale.
But this policy only protects the lender's interest. It does not protect you. That is why you need an owner's policy, which can be issued at the same time as the loan (mortgagee's) policy.

Q. What danger of loss can you face?
A. If a lender has title insurance protection and you do not, what danger of loss can you face?

As an example, a purchase of property is made in the amount of $200,000. The equity investment or down payment is $40,000, leaving a loan amount of $160,000. But your equity of $40,000 is not covered.
What if some 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. If the legal defense is not successful, the result could be a total loss of title.
The title insurance company pays the lender's loss and is entitled to take an assignment of the borrower's debt. The borrower loses the down payment, any other equity that may have accumulated, and the property. And the balance of the note is still owed.

Q. How can there be a title defect if the title has been searched and a loan policy issued?
A. Title insurance is issued after careful examination of the copies of the public records. But even the most thorough search cannot absolutely assure that no title hazards are present, despite the knowledge and experience of professional title examiners. In addition to matters shown by public records, other title problems may exist that cannot be disclosed in a search.
Here are a few of the most common hidden risks that can cause a loss of title or create an encumbrance on title:
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

Q. What protection does title insurance provide against defects?
A. Title insurance will pay for defending against any lawsuit attacking your title as insured, and will either clear up title problems or pay the insured's losses. For a one time premium, an owner's title insurance policy remains in effect as long as you, or your heirs, retain an interest in the property, or have any obligation under warranty in any conveyance of it.

Q. On a refinance, am I entitled to a credit on my title policy if I do not close with the same title company?
A. 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 title policy premium if the last title policy issued was 7 years or less regardless of the title company that issued the policy. A credit is issued as follows:
40% for a title policy less than 2 years old
35% for a title policy greater than 2, but less than 3 years old
30% for a title policy greater than 3, but less than 4 years old
25% for a title policy greater than 4, but less than 5 years old
20% for a title policy greater than 5, but less than 6 years old
15% for a title policy greater than 6, but less than 7 years old

Q. Is it common in Texas for the seller to pay for the buyer's owner's title policy?
A. Yes, in Texas it has been standard for the Seller to pay for the Buyer's owner's title policy unless negotiated otherwise.

Q. If closing prior to the end of the year, is it imperative that the taxes be paid for the entire year?
A. In Texas, taxes are due and payable for the current year on October 1 and 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 require taxes to be paid at closing if they close after October 1. Regardless of whether taxes are paid, taxes will be prorated through the date of the closing charging each party for taxes for the portion of the year in which they own the property.

Q. What is the Texas Homestead Exemption?
A. Stated simply, the Texas Constitution and various statutes establish the homestead rights in Texas. The homestead rights protect a family's homestead from claims of creditors, both secured or unsecured, with four 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.
Funds borrowed to finance work and materials used in construction
permanent improvements on the homestead (i.e. mechanic's lien).
For property taxes due on the homestead.
Equity loans.

Q. What are the applications of the Homestead Law in Texas?
A. Article 16, Section 50 of the Texas Constitution states that "No mortgage, trust deed, or other lien on the homestead shall ever be valid, except for the purchase money thereof, or improvements made thereon, as herein before provided, whether such mortgage, or trust deed, or other lien, shall have been created by the owner alone, or together with his or her spouse, in case the owner is married. All pretended sales of the homestead involving any condition of defiance shall be void. This does not mean to say that a mortgage on a homestead cannot be refinanced to secure a more favorable interest rate.

Q. What are the new home equity loans all about?
A. Since Election Day on November 4, 1997, Texans have been inundated with solicitations to borrow against the equity in their personal residences. Prior to that day, borrowing against the accumulated equity in a Texas homestead property was restricted by both the Texas Constitution and by statutes. Traditionally, a lender could only acquire an enforceable lien upon homestead property if the borrower used the money loaned to:

• Purchase the property.

• Improve the property.

• Pay taxes on the property.

The change that voters approved on November 4, did nothing more than add an additional category to the list of acceptable uses of a homestead to secure a loan. The traditional protections afforded a Texas homestead remain unchanged.
Beginning on January 1, 1998, Texans who have adequate equity in their homestead property will be able to use it to secure a loan. The proceeds of the loan may be used for any purpose desired by the homeowner. Of course, if the loan is not repaid the homestead property may be subject to foreclosure.

It was the prospective loss of homestead property that drove many Texans to oppose a change in the homestead law. Those opposition forces, however, did have their effect on the legislature. The new law imposes restrictions on both the borrowers and the lenders.

Opponents argued that, if allowed, Texans would borrow against homestead equity unnecessarily or use the borrowed funds for speculation or risky ventures. There was also fear expressed that unscrupulous lenders would make loans to high risk borrowers in the hopes that they would default. The lender could then quickly foreclose and receive a windfall profit from any remaining equity in the property.

Proponents of the new law argued that Texans were responsible borrowers and were being hindered by an intrusion of government into their personal affairs. Allowing a homeowner to borrow needed funds would eliminate unnecessary sales of homestead property. In addition, most Texans using their personal residence property as security for a loan would be able to claim the interest paid as a taxable deduction, a benefit previously available in every state except Texas.

The following safeguards and procedures have been placed in effect to limit the risks to Texas homeowners:

• Voluntary consent to the lien must be given by all owners and their spouses.

• The total of all borrowing against a homestead property may not exceed 80% of its fair market value.

• Loans are non-recourse to the borrower unless obtained through fraud.

• A judicial foreclosure process is required.

• Only one second-lien equity may exist on a property at any time.

• No revolving credit or credit lines; loans must be for a fixed amount.

• Lender may not require any additional security be pledged.

• Lender may not accelerate the debt or foreclose simply because the fair market value of the property has declined.

• The loan must be repaid in equal monthly installments; no balloon payments.

• No prepayment penalty will be allowed if the loan is paid off early.

• Agricultural property may not be used.

• Only qualified lenders will be allowed to make Home Equity loans.

• Borrowers may not close until 12 days after receiving a prescribed disclosure notice from the lender.

• 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.

The foregoing is for general informational purposes only and is not a complete listing of the restrictions and requirements relating to home equity loans. Certain of the restrictions may not apply to every loan. Prospective borrowers are encouraged to obtain professional advice before obtaining any loan.

Q. How do I declare a homestead?
A. Upon purchasing a home, contact your county's appraisal district where your property is located and request the necessary forms for declaring your homestead.

Q. What will happen at my closing?
A. Your closing will take place at Federal Title Insurance Company, which will act as escrow agent and title insurer. As detailed in the earnest money contract, the title insurance agent may hold the earnest money, prepare the closing statement and generally coordinate with all the entities involved in the closing. This includes collecting invoices and written information from the mortgage lender, insurance agent, surveyor, attorneys for buyer-seller-lender, tax search firm, mechanical and termite inspection companies and 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. 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.

Q. How are title insurance rates determined?
A. The policy forms, premium rates, rules and procedures for title insurance are promulgated and controlled by the Texas Department of Insurance in accordance with the Texas Insurance Code, Chapter Nine. Therefore, all title companies charge exactly the same premium rates