Title insurance is a form of indemnity insurance which insures against financial losses incurred as a result of either defects in title to real estate or unenforceable liens. It protects both the owner’s and the lender’s financial interests in the event of a lawsuit against the title, so the owners title insurance policy is an essential for a purchaser of real property and always required as part of the closing the deal. Any reputable hard money lender will always require a “mortgagee” policy of title insurance as part of the loan documentation, before funding an asset-backed loan.

A lender’s title insurance policy has more benefits than simply paying out money. The title insurance company will do the research and public records legwork that would otherwise fall upon the lender. They will answer (and guarantee their answers with their insurance) questions such as:

• Does the borrower have a vested interest in the property being offered as collateral?
• Are there unpaid taxes or other types of liens that would take priority over repayment of the new loan?
• Are there any existing loans that already have a claim on the property?
• How has the property been described in legal terms?
• Is the property already in or pending foreclosure?
• Is the borrower currently declaring bankruptcy?
• What position would the lender have on the secured property?  Is this a “first mortgage loan” or a “second mortgage loan”?

Risks Protected for by Title Insurance 

The title insurance company doesn’t just give you the answers; they insure both the new owner and the lender against possible hidden risks such as:

• Borrower is falsely impersonating property owner.
• Deed, release or will is forged.
• Property has undisclosed or missing heirs.
• Papers that were executed under power of attorney that was expired or invalid.
• Mistakes made in the record of legal documents.
• Misinterpreted wills.
• Deeds by minors or persons of unsound mind.
• Liens for back taxes such as gift, inheritance, state, or income.
• Various types of fraud.
• Improvements on the property actually within the legal boundaries of the property.  In order to provide this type of insurance the title company will require a full survey or a simplified survey called an ILC (improvement location certificate).

Title insurers get their information from public records. It is important to remember that even with a careful and thorough examination of these records, there is a possibility that other undisclosed problems with the title may still exist that the coverage will insure you against. Do not fail to make sure you have appropriate title insurance when you purchase a property. Retaining an attorney to assist you to understand your title insurance is something that Montegra strongly recommends to its hard money borrowers.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  [google_authorship] has been in the private capital lending business for 41 consecutive years.