The title commitment is a report of the status of the property being sold. It will contain information on the record owner, proposed buyer and lender, the legal way the property is described, and encumbrances affecting the property. The commitment is set out into three main sections known as Section A, B-1, and B-2. Each section containing pertinent information to the transaction and the status of the title of the property.
Schedule A is divided into four sections. At the top of the Schedule A page is a date known as the effective date. This date will be approximately 1 to 2 weeks behind the actuall date. This date represents the date that the court house records are acruately posted through. Section 1 indicates the policies to be issued the amounts of the policies and the premiums to be collected at closing. The buyers name will be shown as the proposed insured for the owner’s policy and the lender will be shown as the proposed insured for the loan policy. Section 2 indicates what type of estate or interest the owners have in the land. This is typically Fee Simple which is the most complete way title is held. Basically the owner posses all surface and sub-surface rights to the land. Other examples would be life estates, leasehold estates, and mineral interest only. Section 3 indicates how title is vested or in whom. This should be the sellers of the transaction. However many times the title vesting turns out different then what the real estate contract may have listed the sellers to be. When discrepancies are found in the vesting compared to the contract, requirements will be made in Section B of the commitment to address the discrepancies and clear up the title records. Section 4 of Schedule A is the legal description. It is what it is, the legal way the property is described in the land records established by recorded plats or governmental surveys.
Requirements in the Commitment
Schedule B is typically divided into two sections, however not all title companies use the same standard format when it comes to the commitment. In other words some do not split up the Schedule B into to two sections of B-1 and B-2. However the schedule B section or sections will contain requirements to be met in order to clear the title and insure.
In title insurance, a requirement is a written condition placed in Schedule B (1) of a commitment that must be satisfied before the transaction can close. If a requirement cannot be satisfied, it will be converted into an exception in the policy. Lenders also include requirements in their closing instructions, and these requirements must be met before the transaction can close. The process of satisfying requirements is called "clearing title." There are four typical or general requirements made on each title commitment, they are as follows:
- Pay the agreed amounts for the interest in the land and/or mortgage to be insured.
Pay us the premiums, fees and charges for the Policy.
- Documents satisfactory to us creating the interest in the land and/or mortgage to be insured must be signed, delivered and recorded.
- You must tell us in writing the name of anyone not referred to in this Commitment who will get an interest in the land or who will make a loan on the land. We may then make additional requirements or exceptions.
Satisfying these requirements is quite simple. Requirement A is controlled by the contract itself. It is the agreed sales price in the contract and also covers the agreement of the lender and purchaser as to the amount of the mortgage and its terms. Requirement B well it is what it is, the title company needs to paid the premiums and any other cost associated in order to issue the policy. These premiums and cost are paid at the closing and will be shown on the HUD settlement statement. There is not an additional bill sent out for these premiums to you or your client. Requirement C refers to the deeds, mortgages, affidavits and any other documents that must be signed in order to clear the title. These documents are typically prepared in conjunction with and by the title company, lender, and attorney’s involved in the transaction. Requirement D is a safeguard for all parties involved. After review of the initial commitment it may be determined that not all parties were listed or notified. The title company will also reserve it’s right to add additional requirements if the records reveal any additional concerns that would have to be cleared up to insure the title.
The remainder of the requirements on the title commitment results from the terms of the transaction itself and what is found of record against the property or the individuals/entity in title. Most of these requirements will fall into the following categories:
- Properly executed deed(s) from the vested parties to the purchasers.
- Properly executed mortgage from the purchaser to lender.
- Properly executed releases for any open mortgages on the property.
- Properly executed releases or satisfactions of any judgments, liens or bankruptcy issues.
- Proof of good standing, as well as corporate papers and resolutions for entities coming in and out of tile.
- Plus any other unique circumstances to the transaction that will call for explanation from the seller or buyer to satisfy the clearing of title.
Remember all titles are different and the requirements to clear the title on one piece of property will not be the same for even a piece of property right next door. What affects property the most is people and the course of life. Many requirements made on a title commitment are a result of changes in people’s lives; marriage, divorce, death, accidents, bankruptcy and many other life changing events. Title companies do not make these requirements to be difficult they are made with the ultimate goal to clear the title and retain the lowest amount of risk for the seller, purchaser, and lender as to any hidden defects on the property.
Exceptions in the Commitment
The second part of Schedule B, sometimes called Section 2, contains the exceptions. The basic definition for exceptions is all of the matters affecting the title to the insured land that the title company excepts from the coverage of its policy. These matters are revealed by the title search and derived from underwriting guidelines. The title company must take exception to all defects in title, liens, encumbrances and outstanding interests affecting the title.
The commitment exceptions are typically divided into two categories. The first is what many refer to as the standard exceptions and the second are known as the special exceptions or exceptions to the property that is unique to that particular piece of land. There are primarily six standard exceptions on the title commitment that I have listed below. These standard exceptions will remain on the policies to be issued unless they are disposed of to the satisfaction of the title company.
- Defects, liens, encumbrances, adverse claims or other matters, if any, created, first appearing in the public records or attaching subsequent to the effective date hereof but prior to the date the proposed insured acquires for value of record the estate or interest or mortgage thereon covered by this commitment.
- Encroachments, overlaps, boundary line disputes, shortage in area, or any other matters which would be disclosed by an accurate survey or inspection of the premises.
- Rights or claims of parties in possession not shown by the public records.
Easements or claims of easements, not shown by the public records.
- Any lien or right to a lien, for labor, or material hereto or hereafter furnished, imposed by law and not shown by the public records.
- Taxes or special assessments which are not shown as existing liens by the public records.
The first standard exception above is typically removed by the title company when an updated search is performed prior to the closing and recording of the documents. This exception is made of course for those rare instances when something does get filed of record against the owner or the property itself (such as a lien, easement or assessment) during the period of time when the commitment was issued and the deed and mortgage are filed of record.
The remaining five standard exceptions can be removed from the policy by the execution of an owners/sellers affidavit. This affidavit lists a series of questions that the sellers answer pertaining too and addressing the uncertainty of the standard exceptions. If any of the answers can not eliminate the standard exception then further information will be requested or the exception will remain on the policy. Depending on the type of transaction there are also other underwriting guidelines to follow in lieu of the affidavit in order to remove or insure over these standard exceptions.
The special exceptions that affect the property will include items such as:
- Taxes (current and future)
- Easements and restrictions as established by the plat
- Restrictions and Homes Associations sometimes referred to as Covenants, Conditions, and Restrictions (CC&Rs)
- Right of way easements for utilities and roads
Special assessments
- Rights of tenants in possession
- Access to and from the parcel
- Mortgages, and other lien interest
- Other miscellaneous items that have been filed of record against the property or notice of which has been given to the company by a survey of the premises or through other communications.
Every property can have many different types of special exceptions due to the properties location and use. Special exceptions shown on the commitment do not always remain on the policy. Some can be removed from proper documentation such as releases or disclaimers being filed of record. Surveys can also help eliminate exceptions when the exact location of easements and right of ways are defined. Overall most exceptions are customary and do not affect the marketability of the property. Concerns about the exceptions by your clients should of course always be addressed with the title company. What I have found in the past is most sellers and buyers just need a simple explanation or clarity on exactly what the exception is and how it affects the property.
We at Homestead Title hope this information on understanding the title commitment has been helpful for you. The basics in every industry are so vital for the success of an individual and the organization. Homestead Title has always placed an emphasis on our staff being grounded in the basics. Please consider our services for your title insurance needs; we will be honored to serve you. Homestead Title: Insuring with experience, integrity, and trust. Expert connection for real estate professionals. Contact us at 913-390-8880.
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