Importance of Lender's Title Insurance

[Andy Mirza]

(I wanted to start this thread separately to avoid hijacking another thread where this subject came up. The topic is important enough to warrant further discussion.)

As @Tracy Z. Rewey pointed out, there's a huge difference between getting back a clean title report and having an actual lender's title insurance policy. Before acquiring a note, you should know if there's an existing lender's title insurance policy on it. Not only does it affect the value of the note you intend to buy and hence the amount you should be paying for it, the lack of a lender's policy means that you're taking all the risk if there are title issues that can come back to haunt you.

In a way, it's similar to having car insurance. You can save the money on premiums but run the risk of having to pay for everything in case things go wrong. 

What kind of things can go wrong?

Once common issue I see are previous loans that never get properly reconveyed in a refinance or purchase transaction. 

Example: A seller sells his home to a buyer. Buyer gets a new loan to pay for the house. Seller's loan gets paid off during escrow. Normal transaction, right? Well, what if the seller's loan never recorded a reconveyance or release of lien? 

In our world, if you wanted to buy the buyer's loan and title still showed the seller's loan on title, there's a big issue. The buyer's loan is actually a 2nd and not a 1st, until proven otherwise. Whoever owns the buyer's loan can't sell their loan until this issue is taken care of. If they can't locate the recorded or unrecorded reconveyance, their next course of action would be to file a claim with their title insurance company.

Now, it would be up to the title company to clear up the title issue. In this situation, they would most likely do the research & track down the missing document. If they couldn't locate it, they would find proof of payment on the payoff & get another document executed by the appropriate party and record that to release the lien.

If there was something fraudulent involved and the seller's loan actually never got paid off, the title company might pay the buyer's lender the face amount of the loan. (We actually have a situation exactly like this with one of our NPNs.)

Personally, I'll pay the premium instead of risking the entire amount of my investment.....