What Is a Preliminary Title Report?

What Is a Preliminary Title Report?

You’ve found your dream home and are eager to close the deal, but is everything truly in order? Before proceeding, it's essential to look into title insurance to ensure your investment is protected.

Title insurance safeguards both you and your lender against potential losses from title issues, such as ownership disputes from unknown heirs. The title company provides this protection, but before issuing the insurance, they will first generate a "preliminary title report." This report may seem like an additional step in an already complex process, but it's a crucial measure to protect all parties involved in the transaction.

The Purpose of a Preliminary Title Report

A preliminary title report offers detailed information about the title and history of a property. It helps confirm that the seller is the rightful owner and that no unexpected heirs are laying claim to the property. The report also highlights any encumbrances, such as tax liens, mortgage liens, or easements, which could impact you once you purchase the home.

The title company generates the report by reviewing public records and official documents. Any issues or exceptions uncovered in the report are excluded from title insurance coverage, meaning the buyer, seller, and lender may be held responsible for any associated losses.

Who Requests the Preliminary Title Report?

Lenders often require a preliminary title report and title insurance as part of the loan process. In a typical real estate transaction, the seller typically arranges for the title company to prepare the report after escrow is opened. The seller then includes the report in their disclosure packet, which provides essential documents for the buyer and lender.

In most cases, the seller covers the cost of the buyer's title insurance, though this can vary depending on regional customs. However, the buyer is always responsible for the lender’s title insurance.

What to Look for in a Preliminary Title Report

The first thing to examine is the seller's ownership rights. This will confirm the identity of the actual owner and their legal rights to the property. Property ownership types vary, with "fee simple" being the most common, offering complete rights to sell. However, previous owners may have imposed restrictions on the property, which could affect how you can use it in the future.

Next, look for any liens on the property, including unpaid mortgages, property taxes, or debts related to repairs. These liens are listed as numbered items in the report and can affect your purchase. Be sure to review them thoroughly.

You may also encounter standard exceptions related to general laws or local regulations. For example, construction laws or restrictions on property use might apply. Title insurance won't cover the cost of violations, so these should be considered when deciding whether to move forward with the purchase.

Why Buyers Need a Preliminary Title Report

A preliminary title report serves as a safeguard for buyers by highlighting potential title issues, liens, and encumbrances before proceeding with the purchase. It offers reassurance that there are no hidden ownership claims and provides a chance to resolve any outstanding issues before finalizing the deal.

The report will confirm who owns the property and whether they have the right to sell. It will also uncover any additional owners or heirs who may try to stake a claim after the sale.

Benefits for Sellers

For sellers, providing a preliminary title report as part of the disclosure packet can help gain the buyer's trust and speed up the closing process. The report helps avoid delays by identifying potential title issues upfront, which could otherwise prolong the transaction.

Additionally, the report ensures that the seller can’t be held liable for undisclosed liens or restrictions that might have otherwise derailed the sale.

Next Steps After Receiving the Report

Once you’ve reviewed the preliminary title report, work closely with your real estate agent to assess the findings. If any issues, such as liens or encumbrances, arise, negotiate with the seller to resolve them. If the situation seems unfair or unclear, you can still choose to walk away from the deal.

By understanding the role of the title company and the purpose of the preliminary title report, you’ll be better equipped to navigate the complexities of real estate transactions and ensure your investment is secure.