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Finding a home you love and getting your offer accepted is an incredibly exciting moment. However, that moment can turn sour very quickly if you discover during the closing process that there’s another claim to your home’s title.

Most homebuyers today must obtain title insurance, which protects the buyer and their lender against losses incurred from the property’s title. Basically, if someone says “actually, that house is mine and the person who is selling it is not allowed to sell it,” title insurance covers your costs if you’re forced to go to court.

Before you can get title insurance, you’ll need to get a preliminary title report.

What does a preliminary title report do?

A preliminary title report details all available information about the title and background of a property. It’s used to determine that the seller is the legal owner of the property and is entitled to sell the property. It rules out the possibility that an unknown heir to the property may one day claim ownership, and identifies any encumbrances, like liens or easements, on the property. Encumbrances and conflicts can complicate homeownership and will need to be resolved before you proceed with purchasing the home.

A title company will build this report by reviewing public records and official documents. Any issues that they discover will be marked as “exceptions” and excluded from title insurance coverage. You’ll have to decide with your lender if exceptions are concerning enough to withdraw from the purchase.

To break it down, here’s what you will find in a preliminary title report:

• A detailed description of the property, including boundaries, lot size, and established easement or encroachments, if they exist.
• Liens or outstanding debts against the property, if they exist.
• Restrictions regarding the use of the property, sometimes including covenants, conditions, and restrictions (CC&Rs) for condos.

Who is responsible for requesting a preliminary title report?

In most real estate transactions, the lender requires a preliminary title report and title insurance coverage. Usually, the seller (or their agent) initiates the process during closing by hiring a title company after escrow opens. When complete, the seller includes the preliminary title report in their disclosure packet to be reviewed by the buyer and the lender.

In a cash sale, you won’t have a lender asking for a preliminary title report, but you should still request one to protect your purchase from potential restrictions.

Why do you need a preliminary title report as a buyer?

The most important intention of a preliminary title report is to determine the extent and nature of the seller’s property ownership. Most of the time, the seller is a stranger to you — how are you to know they’re actually the property owner? A preliminary title report confirms the identity of the real owner and tells you what adequate rights they have over the property.

The US has a few different types of property ownership. The most common is “fee simple,” which gives the owner the complete right to sell the property. Sometimes, this comes with conditions, however. A past owner may have legally stipulated that the property can’t be sold to a property developer, or be turned into a hotel. Homes with many past owners may have some funky stipulations that a preliminary title report can suss out.

Even more importantly, a preliminary title report identifies liens on items like owed mortgage amounts, property taxes, or construction fees. Debts and third-party interests could transfer to new property owners if not properly addressed, so it’s crucial to have your attorney go through a preliminary title report to protect you from liens or encumbrances.

Finally, a preliminary title report is a good way to figure out what restrictions or exceptions are put on the property by the local government. For instance, if the property lies on a wetland or in a historic district, you may face significant obstacles in making changes to the home.

Essentially, a preliminary title report provides:

• Assurance that there’s no other current owner of the property
• The person selling the property is authorized to sell it
• Information about liens, debts, or encumbrances on the property
• Information about restrictions or easements
• A foundation for title insurance

What does title insurance cover?

When the preliminary title report is all set, you’ll be ready to move toward getting title insurance. Every homeowner should have title insurance. When you do, any liability for damages incurred due to errors or oversights in the preliminary title report falls on the title company, not on you or your lender. (Almost all lenders require borrowers to purchase a lender policy, but you may not be required to purchase one for yourself. It’s still a good idea to purchase both.)

What title insurance covers depends on your specific policy. There are many potential ownership claims that could arise, but general policies tend to be fairly far-reaching and cover all aspects covered in the preliminary title report.