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Before closing a real estate transaction, the title company performs a title search to verify the marketability of the title. This is perhaps the most important task once the transaction details have been agreed, because a buyer or lender needs to be certain that no one other than the seller or borrower holds a legally cognizable interest in the property.
Title examination entails investigation into the chain of title to ensure that there are no broken links in the chain. If the chain is unbroken, the purchaser will have a good and merchantable title, and any lender will take a valid and superior interest in the property, above everyone else with an interest including the borrower and any creditors or lienholders. If the search results show a clean chain of title, that means there is a history of owners with no apparent breaks in the conveyances, and a full accounting of all prior owners by conveyance, foreclosures, divorces, or deaths.
A single necessary document that is missing will break the chain. If the purchaser closes the transaction and a necessary document is later discovered to be missing from the chain, there is a high hurdle for that purchaser to clear in order to establish a claim of title. This burden has been established to thwart fraud and abuse. To resolve the break, a purchaser could resort to statutory methods, secure an affidavit, or record a corrective deed. If those options fail, the only alternative may be filing an action to quiet title in order to adjudicate the matter and establish title in the name of the claimant.
As discussed in another post about recording deeds, a failure to record an instrument, such as a deed, does not automatically mean the title is unmarketable. But if a creditor or subsequent bona fide purchaser acquires an interest in the property without notice of the unrecorded instrument, the title may become unmarketable under the Texas Property Code, and the purchaser might ultimately lose any interest in the property.
Of course, if any of these problems are identified before closing, the purchaser can take action to avoid uncertainty over the title. Title insurance aids the buyer in this discovery process, and helps to protect the purchaser from any unidentified title issues in existence before the date the policy was issued. The insurer will thoroughly inspect the title history, listing any issues it finds. Anything on this list will not be covered by the insurance policy, but it gives a prospective buyer the chance to address the issues before proceeding with the purchase. If the buyer proceeds, the policy would cover any remaining, pre-existing, and undiscovered title issues, regardless of whether the issues were undiscovered because of negligence or innocent mistake.
Title insurance policies often contain limitations, so it is worthwhile to understand what is covered and what is not, and even consider purchasing extended coverage for maximum protection.