So, you’ve recently gone under contract to purchase a home. Congratulations! 🎉
Before you actually close on the purchase, however, you’ll want to know everything you can about the property, including anything that might affect title to it (who owns and can use it). The best way to find out about such things is to perform a careful review of the title commitment, issued by your prospective title insurer.
If you know what to look for, examining the title commitment can reveal important information about who owns, or owns a piece of, or can use the property you are about to purchase.
A title commitment is basically the title company’s promise to issue a title insurance policy for the property after closing. The title commitment contains the same terms, conditions, and exclusions that will be in the actual insurance policy.
Almost every purchase and sale agreement contains language requiring the seller to provide the buyer with title insurance. Most all title companies across the country issue the title policy using forms distributed by the American Land Title Association (ALTA).
An owner’s title insurance policy protects you, as the new owner, in the event that an unknown issue affecting the property at the time the policy is issued later causes problems with your title to the property.
If you are taking out a mortgage for the property, your lender will additionally require a “lender’s policy,” also known as a “mortgagee’s policy,” which protects the lender against the same sorts of issues. (The lender is, after all, counting on the property as collateral, and doesn’t want to later discover that some unknown party has competing claims against it.)
If you have the title commitment in hand, does that mean you don’t need to worry about your title because your title insurance will cover any problems? Well, not quite.
The title company is willing to insure only against issues that come as later surprises. Before issuing the title commitment, it researches public records and excludes from insurance coverage any items that might conceivably affect the title to the property. The title company refers to these exclusions as “exceptions.” If, during the time you own the home, you run into problems arising from one of these excluded items, you cannot turn to the title company for help.
Let’s say, for example, someone appears at your door a month after you move in and informs you she will be using the easement she has on your property to store gravel in your back yard. This comes as a surprise to you, so you call your title insurance company. If the easement was listed as an exception on your title insurance policy (which, with an easement, is almost always the case), your title insurance company will politely inform you that it is not responsible for fixing this problem: You will be dealing with it on your own.
When a title company issues insurance, it will list as exceptions and exclude from coverage certain standard items that apply to all properties. It will also make exceptions out of specific items discovered during its records search that pertain only to the property being insured; and there may be several of them.
Whether standard or specific, not every exception that a title company lists in your policy is necessarily of concern. For example, the title company might list as an exception a public utility easement (such as the power company’s right to stretch wires across your property or come check your meter). Such an easement is a fairly common exception, and so long as the power company’s use of the easement won’t interfere with your own use of the property, you probably don’t need to worry about it.
Some problematic exceptions, however, could impact your ownership or use of the property or include terms unacceptable to you. If, for example, you have particular plans for the property; say, you plan to build a shed in the back yard; you’d want to know about anything that might interfere with those plans, such as that gravel storage easement mentioned above.
Exceptions might also be significant because they point to expenses you’ll have to pay relating to the property, such as covenants requiring payments to the owner’s association governing the property.
Or, the exceptions might alert you to changes that will need to be made to the property. For example, perhaps you’ll see that the title company has made an exception for items appearing on a recorded survey of the property. By reviewing the survey, you might see you will need to remove the fence in back because it is not on the property line, but is actually a few feet into the neighbor’s property. If this issue is not discovered and resolved prior to closing (for example, by having the seller either move the fence or obtain an easement from the neighbor for its existence on the neighbor’s property), the title company will give you no help in resolving this issue. You could be in for a large expense after closing if the neighbor demands you move the fence off his or her property.
For these reasons, it’s important for you or your attorney to examine the title commitment carefully, understand the exceptions, and determine whether any are unacceptable. Since most purchase agreements contain a provision making the purchase of the property contingent on the buyer’s review and acceptance of the condition of the title, resolving any issues found in your examination of the title commitment before buying the property is a valuable opportunity to save yourself from nasty title trouble later.
Although your main goal when reviewing the title commitment is to examine and understand the items excluded from coverage, reviewing the accuracy of the basic information in the commitment can also help avoid later problems. This involves:
As a side note, when you see the premium amount, you might wonder who is paying for this policy. Your purchase agreement specifies who pays: the buyer, the seller, or a split between both. This is a negotiable item, but is often determined by custom in your area (each state, county, or city might have differences in who customarily pays).
Although completing a thorough review of that bundle of papers called the “title commitment” can be a lot of work, it is definitely worthwhile. When the review is complete, if you are satisfied with the title and proceed to closing, you can almost set aside any worries to do with your home’s title insurance coverage. But note that we said, “almost.”
After closing on the property, you will receive the actual “title policy” from the title company. Once you have this in hand, it’s a good idea to compare it with the title commitment and ensure all the information is accurate and that any changes you requested during the title review period were incorporated into the actual policy. After this final review, go ahead and file that policy away (in a safe place that you can locate again of course!) and enjoy your new status as “owner.”