Lender's title insurance in a family loan

[Rob Redcay]

Hi gang,

I'm excited to be here and to get wisdom from all of you. My wife and I are buying are first home in LA. We're "cash buyers" but behind the scenes, my parents are loaning us about 70% of the price.

As part of the transaction, seller is paying for a home owner's title insurance policy in the amount of the sales price. As I understand, that protects us in case of any defects in the title. It's free for us which is great! Title company is asking if we also want to buy a lender's policy for my parents. That lender's policy be approximately $800 with all the fees.

Since my parents and I have aligned interests, this seems redundant to me. I'm tempted to tell the Title people that we don't want it. Can any of you think of an example where my owner's policy would be insufficient and we'd wish we additionally had the lender's policy?

Thanks!

-Rob

[Jon Holdman]

@Rob Redcay this should not be your decision.  If you were getting the loan from any bank, they would absolutely require a lender's title policy.  This policy protects the lender against any title defect that would reduce the value of their security interest - i.e., your property - in the event they had to foreclose.  No matter what you say, your interests and your lender's interests are not aligned.   Its great (for you) that you're parents are willing to step in an be your lender.  No doubt they are an easier lender than any bank.  But they are still a lender and still need all the protections a lender should have.

What a title policy does is to back up the grantor of a transfer.  The owner's title policy is backing up guarantee (the warranty deed) that the grantor (of the property, the seller) is giving to the grantee (the buyer - you.)  When you get this loan, you will give (i.e., grant) a security interest in the property to your parents to provide collateral for the loan.  The lender's title policy backs up that grant.  It provides back up to the claim you're making when you grant the security interest to your parents.

Nobody goes into a loan expecting to default.  But it does happen.  If it happens to you, and there does turn out to be some title defect that prevents your parents (or whoever owns the loan at the time) from taking possession of the property then remedying that problem will be YOUR problem instead of the title insurance companies problem.  It is possible that at some point in the future circumstances change.  Your parents may need money and sell the loan.  You could end up selling the house subject to and now there's a different borrower.  Your parents, as lender, should be getting independent advice about the lender's title policy.  In this decision, your interests (not spending the $800) are absolutely out of alignment with your parents (having protection that they have a good security interest.)  If you choose not to buy this policy, and this does end up in court (and you should ALWAYS assume deals will end up in court when making a decision like this) a lawyer will drag you over the coals about your poor advice to your parents.