What is an exception to title?
A property title is the legal document that indicates the ownership of a property. When you hold title to a property that means you own the property. When a property is sold, the title is transferred from the property seller to the property buyer.
Before the property is transferred, however, it is important for you (and your lender if you are getting a mortgage to buy the property) to make sure that there are no issues with the property title that could interfere with your ability to own the property. This is why almost all mortgage lenders require buyers to order a title report, also referred to as a title search or abstract.
The title report is provided by a licensed title insurance company or real estate attorney who reviews public and private records to verify the property ownership, specifications, land rights, zoning and any easements or liens on the property.
Review What is a Title Report?
An easement is the legal right to enter or use the property by a third party that does not hold an ownership interest in the property. A lien is any debt or obligation that is secured by the property, such as a mortgage or home equity loan.
If the title report identifies no issues that interfere with the property seller’s ownership of the property, this is called a “clear” title and you are free to move forward with the property purchase. A clear title also enables the title insurance company to issue a title insurance policy that protects the policyholder against financial loss from any errors or defects that are found in the title report after your mortgage closes.
If the title report identifies issues that could interfere with or encumber the ownership of the property, these are called exceptions to title. Examples of title exceptions include the following:
Ownership disputes including if the title report identifies an ownership interest in the property held by someone other than the property seller
Any liens secured by the property such as a mortgage or past-due property tax bill
Any easements on the property including access easements granted to utility companies
Any carve-outs for specific land rights such as mineral, water and air rights or leases held by a third party
It is important to highlight that most title reports include exceptions and there is a difference between allowable exceptions and exceptions that must be resolved before a property title can be transferred.
Examples of allowable exceptions to title include any easements and land rights carve-outs that are acknowledged and accepted by both the property seller and buyer. Liens against the property that are repaid in full when the property is sold, such as a current mortgage, are also acceptable title exceptions. In this scenario, the title insurance policy does not provide coverage for these items but the policy can be issued.
Examples of title exceptions that are not permitted include ongoing ownership disputes and liens that may not be paid off when the property is sold, such as an outstanding property tax claim. These issues must be resolved before the title insurance policy is issued, which is required for your lender to provide final mortgage approval.
Now that you understand what an exception to title is, you know what to focus on when you review the title report for the property you are buying. Identifying and resolving title exceptions clears the way for the property title to be transferred and for you to take ownership of the property.
Sources
“What is lender's title insurance?” CFPB. Consumer Financial Protection Bureau, September 12 2017. Web.
“What is owner's title insurance?” CFPB. Consumer Financial Protection Bureau, August 7 2017. Web.
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