Understanding Title Commitments
If you have ever had any involvement in a real estate transaction, including the sale or purchase of a home, you were likely aware that a title company was involved in the transaction, although you may have been confused regarding the title company’s exact role. Title companies perform a variety of functions including: (i) acting as a third party escrow agent (holding earnest money until closing), (ii) preparing documents required to convey title to real estate in your State (deed, vendors affidavit, sales disclosure forms, etc), (iii) preparing the settlement statement that details the various closing costs and credits and the amount of money that must be paid by the buyer at the closing, (iv) conducting the closing itself, and (v) issuing title insurance.
While each of these functions are important, this blog will concentrate on the means by which a title company issues title insurance. Title insurance comes in two forms, owner’s policies and lender’s policies. An owner’s policy is issued to the owner of the property and insures that no interests in the property exist when the buyer takes ownership of the property. A lender’s policy is issued to the owner’s lender that financed the acquisition of the real estate and insures the priority of the lender’s mortgage lien as of the recording of the mortgage.
It is critical that the buyer and the buyer’s lender understand the condition of the title of real estate before closing on a purchase. Other interests in the real estate can significantly decrease, or even eliminate, the value of property. Fortunately, the title company will provide a preview of the interests in real estate before the closing in the form of a title commitment that will allow you to determine if there are any issues that must be addressed.
Most title commitments follow a similar format that is broken up into Schedules. Schedule A provides the basic information for the title policy to be issued, including:
- Commitment or Policy Number – the title company’s internal reference for your file.
- Effective Date of Commitment – the date through which the title company has searched the public records for the parcel of real estate. Any liens appearing in the public records will not appear in the search but will be insured against by the title company.
- Property Address – this is the common address for the property (i.e. 123 Main Street, Indianapolis, Indiana).
- Legal Description of Real Estate – real estate records are based on the legal description for real estate rather than common addresses. The legal description is a means by which the exact dimensions of a parcel can be determined. Such legal descriptions are typically based on surveys and/or plats and provide a totally unique and specific description of your parcel, even if there are two Main Streets in your town.
- Policy or Policies to be Issued – will note whether an owner’s policy and/or lender’s policy is to be issued. May also note the amount of the policies (typically the purchase price for the owner’s policy and the amount of the mortgage loan for the lender’s policy)
- Owner – the current owner of the real estate as of the date of the search.
Schedule B – Section 1 of the title commitment provides a checklist of items required by the title company at or before the closing in order for the title company to issue a policy. For example:
- The buyer must pay the purchase price.
- All taxes owed through the closing must be paid.
- Execution of deed, sales disclosure form, and vendor’s affidavit by the required parties at closing.
- Any state specific requirements regarding specific language to be included in the Deed may also be referenced.
Schedule B – Section 2 of the title commitment provides a list of the title exceptions. Examples include:
- Mortgages of record, likely including the seller’s lender’s mortgage.
- Recorded easements affecting the property.
- Any unpaid property taxes.
- Covenants, conditions and restrictions affecting the real estate.
- Any recorded leases.
Schedule B – Section 2 exceptions must either be resolved by the closing (i.e. past due property taxes paid, seller’s mortgage lien paid off at closing with the sale proceeds) or else they will be exceptions to the title policy. For example, if an easement running across a portion of the purchased property is not released, the buyer will take the property subject to the easement. And given that the easement is listed as a Schedule B – Section 2 exception, your title policy will not provide coverage for removal of the easement. The title policy only insures against liens and encumbrances that are not listed in Schedule B – Section 2 (i.e. the expense of removing a prior unreleased mortgage from the owner that sold the parcel to your seller that is not listed in Schedule B – Section 2 will be the title company’s responsibility).