Reviewing and Dealing With Title Commitment Exceptions Before Buying a Home
A detailed look into what your title insurance policy will and won't cover.
It’s an exciting time -- you’ve found a great property to buy, signed the purchase agreement, and will be attending the closing next month! Don’t get too excited just yet, however. Before you actually close on the purchase, 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.
For basic information on what a title commitment is and why you need to review the condition of title to your property, start by reading Nolo’s article: “Homebuyers: Reviewing the Title Commitment Now Prevents Unpleasant Surprises Later.” Now let’s further explore the kinds of things that typically show up on a title commitment, and how to review it.
Reviewing Your Standard Exclusions From Insurance Coverage
When you review your title commitment, the first list of items you’ll see excluded from insurance coverage are called the “standard exceptions.” (These will most likely appear on what’s called “Schedule B, Section II” of the document, assuming your company uses the form distributed by the American Land Title Association or ALTA, which almost all title companies across the country use.) These are general exclusions from coverage that the title company applies to all properties, rather than being unique to the property you are buying. The standard exceptions are broad, and the first four are typically the same in all states:
- rights of parties in possession (this exception would include, for example, the rights of a tenant with an unexpired lease term)
- encroachments, boundary issues, and other matters that an accurate survey would disclose
- any easements not shown by the public records, and
- construction and worker’s compensation liens.
The remaining standard exceptions vary, depending on the location of the property. They might include exceptions for such things as taxes not shown by the public records, reservations in federal patents, utility service charges, navigation and water rights issues, and treaty rights.
Reviewing the Specific Exceptions From Insurance Coverage
In addition to the standard exceptions that appear on any policy, the title company may list “special exceptions” for items found in its search of the public records that relate specifically to the insured property.
These special exceptions will be listed after the standard exceptions in Schedule B, Section II of an ALTA title commitment. Typically, the special exceptions mention things such as previous deeds, easements, surveys, covenants, outstanding liens, and plat maps. Anything found that may pose a potential problem with the title to the property, impact its value, or affect your use of the property will likely show up on this list of special exceptions.
As with the standard exceptions, if a problem relating to one of these excluded items crops up later, you cannot turn to the title company for help. However, many of the exceptions will not be problematic, and a few will automatically be taken off at closing. Most notably you’re likely to see an exception for the outstanding amount of seller’s mortgage, which will be paid off from the proceeds at closing.
However, if there is an exception for a lien, perhaps for unpaid child support, and the title company hasn’t required that it be paid at closing, this is an issue you’d want to take steps to resolve, primarily because you want the seller to take care of any required payments rather than passing the responsibility to you along with the house. Part of the purpose for issuing a title commitment is that it gives everyone a chance to clear up issues BEFORE the closing. You should review and understand all the exceptions in the commitment to avoid any nasty surprises while you own the home.
Doing Follow-Up Research Regarding Special Exceptions
Merely reading the title commitment may not tell you everything you need to know. To find out more, you or your attorney can request a copy of each of the recorded documents from the title company and review the details.
The list of special exceptions will contain the recording information for each item (the “Book” and “Page” where the document the exclusion refers to is filed in the county records) and a general description of each item. For example, if an exception is listed for “the covenants recorded in 1992 at Book 333 Page 720,” you can obtain a copy of the actual written covenant agreement recorded at that book and page and read the covenants to understand what requirements they impose.
In the case of a recorded easement, reviewing a copy of the easement agreement will tell you exactly who the easement benefits, where it is, and for what it can be used (for example, maybe the easement is for the public utility company to access the power lines on the southwest portion of the property). You should also find the location of any easement on the survey or plat for the property in order make sure you are comfortable that the easement will not interfere with your use of the property.
If there is no recent survey of the property for you to review, you can order one from a professional surveyor. While a plat map can show you the general location of the property, a property survey will contain more detailed information, including the location of improvements on the land, such as where the home, any outbuildings, or other permanent structures (such as fencing) exist.
An accurate survey is also the most reliable way to locate any easements, encroachments, or boundary issues affecting the property. For example, if the neighbor’s garage is actually partially on your property, this will be obvious from a survey, but you would not see it in looking at a plat.
Also, it can be helpful to visit the property and look at the markers the surveyor places on the corners of the property. That lets you determine exactly where the boundaries are. Boundary encroachments – for example, where a neighbor’s fence, shed, or landscaping extends onto your property, or vice versa – are more common than you might think.
You should carefully review, or have your attorney review, the completed survey. Make sure you understand and are comfortable with any easements, encroachments, or other items shown.
Dealing With the Conditions That Led to Exceptions
If you (or your attorney) find something of concern during the title review, you can (assuming you have an objection clause in your purchase contract), notify the seller of the item you find unacceptable and require that the seller remedy it prior to closing.
You might, for example, require the seller to pay off the child support lien and then have the corresponding exception removed from the title commitment as a condition of closing on the property. Or you might have the seller move the back fence or pay your expenses in moving it before agreeing to close the deal. Alternatively, if a problem cannot be fixed, you might avoid taking on the trouble by terminating the home purchase contract altogether.
Removing, Modifying, or Insuring Over Exceptions
Although the title commitment will no doubt list many general and special exceptions, these exceptions are not written in stone. You (or your attorney) can request that the title company remove, modify, or provide coverage for certain exceptions.
For example, the title company may remove or limit the general exception that excludes rights of parties in possession (i.e. people living on the property), upon receipt of the seller’s affidavit stating that no other parties have a right of possession.
Also, in some locations, the title company will remove or modify the general exception relating to matters a survey would show after you send it a recent survey of the property.
If the title commitment contains exceptions for liens due to unpaid items, these, too, can usually be removed if you provide the title company with evidence that the liens have been paid off.
You may be able to obtain additional protection regarding some exceptions by buying endorsements. These are provisions insuring certain exceptions. Also, some title companies offer extended policies, which provide more coverage for a higher premium amount. Talk to your title company to discuss the types of additional coverage and endorsements available (the help of an experienced attorney who knows what to ask for can be especially useful here).
Review the General Information in the Title Commitment
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:
- Checking that information about you, the buyer, is correct, with your names printed exactly in the manner you want to take title. (For example, if you are taking title along with another person, are both your names on the title, and spelled correctly?)
- Comparing the legal description on the title commitment with the legal description on the purchase agreement, as well as checking the physical address of the property, to make sure they match up.
- Checking the dollar amount of insurance provided, which normally is the purchase price for the property.
- Checking the premium rate charged (for example, if the previous owner had a title policy from the same title company, you may be entitled to a discounted, “reissue” rate), and
- Making sure that the correct type of policy is being issued. For example, if your purchase contract calls for an Owner’s Extended Coverage policy, make sure it is that type.
As a side note, when you see the premium amount, you may 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 may have differences in who customarily pays).
After Closing --The Title Insurance Policy
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.”