What is a Title Commitment and Why Do Investors Need One?
The title commitment for insurance is the insurers promise to issue title insurance after closing and should be carefully reviewed and understood. It is essentially a disclosure document that outlines any issues/requirements that need to be addressed prior to closing as well as any liens, obligations, and defects affecting a property. This is a snapshot in time looking backwards. Your title commitment will not ensure any title issues that arise after this date (ex. liens put on the property after the commitment is issued, etc.) and expires six months from the effective date seen on Schedule A of the commitment. After closing, your title company will issue your official Title Insurance Policy using the commitment previously provided. This document is important as it protects you should any disputes arise regarding ownership and provides coverage against losses due to title defects.
Loan Policy and Owner’s Policy
There are two types of title policy’s: the loan policy and owner’s policy. The loan policy is usually a requirement of any lender and will protect their interest in the property they are loaning money on. This policy is usually written at the loan amount. It does NOT insure the owner should any title issues arise. A separate owner’s policy can be purchased that will insure you for the full amount of the property purchase price (not just the loan amount) and will remain in place as long as you have an interest in the property.
Title Commitment Sections
Each title commitment is made up of three parts: Schedule A which covers the basics of the transaction, Schedule B Section I which lists all requirements that must be addressed prior to closing, and Schedule B Section II which addresses exceptions to coverage.
How to Read a Title Commitment
This part of the Title Commitment covers the basics of your transaction. It is imperative that all information here is correct. You will want to check your effective date, the name of the person who currently holds title (verify that this is your seller), the legal description (title companies do not insure addresses only legal descriptions and it must be correct), the proposed buyer and sales price (coverage amount for the owners policy), and the name of the lender and loan amount (coverage amount for the loan policy). You will also want to check that the commitment is countersigned by the insurance company.
Schedule B Section I – Requirements
This section outlines requirements to be addressed prior to closing in order to obtain coverage. You can expect to find information regarding paying off the sellers existing mortgage/lien, obtaining release of liens on the title, recording new loan documents, Taxes and HOA dues past due and current, and correcting errors in title. Fulfilling these requirements are sometimes as simple as providing documentation to the title company.
Schedule B Section II – Exceptions
This section lists things that will not be covered under your policy such as HOA restrictions, mineral and water rights, utility and access easements, encroachments, plat restrictions, liens not found in public record, etc. Most things you will find here are pretty standard however, you must review this section carefully as it may impact the way you use your property and ownership.
Investing in real estate is an important decision. When choosing a lender, be sure to select an experienced one that will walk you through the process and answer any questions you may have. Investor Loan Source is happy to assist you along the the way.