Saturday, June 25, 2011

query: what is the difference between a title commitment and title insurance

If you have ever applied for a mortgage loan, then think of the title commitment as being the same as the mortgage loan commitment letter.  The purpose of the title commitment is to formally state that the property has been approved for title insurance subject to certain conditions.

A smart consumer will obtain a copy of the title commitment prior to closing and READ IT.  This is your chance to know what you are buying and to understand the exceptions to your coverage.

The title commitment typically has four parts labeled Schedule A, B1, B2, and C plus a jacket.  The jacket of the title commitment gives you important information such as definitions, explanations of important basic coverage such as access to the property, and lays out certain basic exceptions to coverage.  This is all very important and so be sure you obtain a copy of the jacket and read it, too.

Schedule A identifies the proposed insured owner and/or lender and the amount of the proposed insurance coverage.  Look to be certain your name is spelled out as you want to see it on your deed.  If it is misspelled on the title commitment, it will likely be misspelled on the deed.  The Schedule A also tells you who owns the property now and when they purchased it.  Take a peek at that information because sometimes you'll find out that the person with whom you negotiated your sales contract may not be the current owner.  How might this impact the terms and conditions agreed to in your contract?  Ask questions as needed.

Schedule B1 lists conditions which must be cleared prior to the issuance of the title insurance.  It may also contain notes or disclosures so you need to read it carefully.  One of the key conditions which must be fulfilled prior to the issuance of the title insurance is that you must pay the premium for the coverage.  This means you do not have any title insurance coverage just because you have a title commitment in your hand.  All you have is a proposal to insure.  It's like a bid from a contractor.

Schedule B2 tells you what will NOT be covered by your title insurance once the policies are issued.  There may be some items listed which can be removed as exceptions prior to the issuance of your policy but do not assume removal.  Ask questions.  What you want to see in Schedule B2 are specific restrictions or conditions and rights granted to others that may impact your use and enjoyment of your real estate.  If you see recitals which refer to specific documents of record, you can request copies of those documents. The clause might say something like "Exceptions, restrictions and conditions as set forth in Book 3, page 252."  In Pennsylvania, the title agent must provide copies without charging you a fee.  You may find a condition which says you cannot park a mobile home or trailer on the lot.  What if you have a RV which you planned to store on your new property?  You'll need to get clarity on that restrictions prior to your purchase.

There are some cases in which we find no specific exceptions.  In these cases, you will see only the basic general exceptions to coverage such as taxes which are not yet due an payable. If you see the words RESTRICTIONS or CONDITIONS or COVENANTS but you do not see a specific reference to a document which might give you a clue as to what these exceptions are then you may be dealing with a title agent who has not done a thorough search.  Some companies will put a broad general exception in a title commitment which excludes all restrictions which may be found on record but they do not do a decent search to find these documents.  I am of the opinion that a general exception of this kind is less than adequate and evidence of a crappy search or examination.  Granted there may be cases in which a plan is referred to in prior deeds but never recorded and therefore would be listed as an exception even though a copy is not available, however, you would at least have this knowledge and an explanation for the absence of documentation.  No reasonable specific explanation means you are being sold less quality than I would buy.

If you plan to install a pool or build an addition and you see rights of way listed in Schedule B2, you ought to locate the rights of way on your lot so you aren't building on a place that could later be the cause for removing your improvement.  A competent surveyor can research and add the location of rights of way to your drawing so you can see them in relation to the house as it sits upon the lot.

Schedule C describes the land to be insured.  Don't make any assumptions about this description being correct. I highly recommend that you have the land surveyed so you can see how the description maps out and can verify that this is the land you walked and intend to buy.  If you opt to not have the property surveyed, then request copies of the development plan or tax map and check it carefully against the description in Schedule C.  If it doesn't make sense, ask questions. 

When you go to closing compare the name of the title insurance company shown on the title commitment to the title insurance company shown on page 2 of the HUD-1 Settlement Statement.  If they do not match, insist upon a correction.  This is very important because if the title agent is a crook or negligent and you never receive your title insurance policy after closing, you will need your title commitment and evidence that you paid for the coverage in order to make a claim.  If the HUD-1, which is your evidence of payment, doesn't clearly include the name of the company on the title commitment, there is a chance your claim will be denied.

So, if all goes well - as it should - you should receive your owner policy within 60 days after your closing.  Look for it.  If you don't receive it within 60 days, call your title agent because something is wrong.  If you aren't being satisfied, contact your state insurance regulator.  They will want to know there is a licensed agent who is not performing and they will assist you.

When you get the owner policy, compare it to the title commitment.  The owner policy has three parts plus a jacket - all of which you should read.  Pay special attention to Schedule B which lists the exceptions to coverage.  Just make certain that no exceptions have been added that are not listed on the title commitment or agreed to by you prior to closing.

In review, the title commitment is a proposal to insure.  The title insurance will be in place once you have closed and have in hand evidence of payment for the coverage which matches the title commitment.  The title insurance coverage will be confirmed by receipt of the  owner policy which should arrive within 60 days after the closing.

Be a smart consumer.  Select your title agent carefully.  Request copies of important documents and read them. If you get any resistance from the title agent with whom you are working, fire them and find a responsive and competent professional.  ;)

No comments: