Before closing on a piece of property, the buyer will receive a document called a title commitment. This document is also called a preliminary title report or title binder. No matter the name, this document is a vital part of the escrow process. While you may want to glaze over the fine details, you need to understand the transaction and your obligations. The title commitment is one document that you will not want to ignore. Here’s what you need to know about this crucial document.
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What Is a Title Commitment?
The buyer agrees to commit to a title policy before closing the deal with a title commitment. The commitment discloses the recorded title claims, encumbrances, and other matters from the title company. One of the primary purposes of the document is to make a commitment to the title insurance company at closing. The exceptions, exclusions, and requirements are stated in the title commitment. There are four main sections of the title commitment document: Schedules A, B, C, and D.
- Schedule A: This section covers all of the basic information about the transaction, including the policy coverage amount, the effective date, the legal name of the current record title owner, and the description of the property. If any of this information is incorrect, it can lead to problems down the road.
- Schedule B: This pre-printed list of standard exceptions outlines what the title policy will not cover. This section is broken into two parts: requirements and exceptions. These matters must be addressed, such as releasing liens, paying off taxes, and correcting errors in the title. If there are any exceptions, they will not be covered under the title insurance policy, including water and mineral rights, existing plot restrictions, and utility easement.
- Schedule C: This section is considered the most critical part of the title commitment. It lists all of the requirements that must be satisfied for the title policy. This information could include updated surveys, liens, judgment lawsuits, and marital statuses. The seller is responsible for resolving these issues in Schedule C in many situations.
- Schedule D: This section discusses the amount of the policy premium. Along with that, there is an explanation of how the premium will be divided among parties and who is responsible for issuing the policy or examining the title.
What Is the Difference Between Title Insurance and Title Commitment?
The title insurance policy and the title comment might seem like the same document. However, the title commitment is issued before the real estate transaction is closed. All of these items in the Schedules must be satisfied before the insurance policy can be issued. After the closing, the title insurance policy will be provided to the buyer.
The title insurance protects the property or home purchasers from any issues with the title, whether they were known or unknown at the time of sale. A title insurance policy can protect the new property owner from:
- Third-party claims against the title
- Fraud or forgery
- Defective recordings
- Prior record liens not listed in the title policy
An insurance underwriting company always issues the title insurance policy. These title companies provide insurance by ensuring any risk on the property. Every item outlined in the title commitment must be satisfied before the underwriter issues the insurance policy.
What Should You Look For In a Title Commitment?
Since the title commitment is a crucial document, you want to ensure that all information is correct. Any misinformation can cause legal headaches in the future. Many buyers neglect to inspect the document, but you should read this commitment carefully. You might even want to discuss it in detail with your agent or attorney. The underwriters can change exceptions and exclusions by adding an endorsement. While you want to make sure all of the information is correct, it is essential to report any discrepancies in:
- Owner’s policy information
- Policy amount
- Buyers’ information
- Sellers’ information
- The legal description of the property
Closing Process for Commercial Real Estate
The title commitment is one step of the commercial real estate closing process. To ensure a completed purchase, a third party will serve as the escrow company during the closing process, following the purchase contract terms, lender instructions, and other practices. Some parts of commercial real estate sales transactions are different from residential ones. It is common for both the seller and buyer to be a legal entity, such as a partnership, LLC, or corporation. In addition, there is an absence of RESPA (Real Estate Settlement Procedures Act). This Act specifies the processes and forms used in residential real estate transactions. However, these forms are not used in commercial real estate transactions.
Residential purchases often used standardized contracts for the transaction. However, these contracts must be customized for transactions with a commercial sale. These commercial real estate transactions have a variety of related contracts and documents. Some of these documents can include the service contracts for equipment, existing tenants’ leases, or bills of sale for equipment. Like a residential real estate transaction, a commercial property includes a title commitment.
Other than those issues that are unique to commercial properties, the closing process is the same. The escrow company will review all of the contracts and documents from the buyer, seller, and lender. They prepare the bills of sale and deeds. The escrow company also receives the funds from the buyer or the lender. After that, they submit the deed to the county for recording and distributing the transaction proceeds to the brokers, seller, or other appropriate parties.
A title commitment is not just another document that you should ignore. It contains vital details that could affect real estate transactions. Whether you have a residential or commercial property, it is crucial to carefully read this document.
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