When funding the purchasing or refinancing of real estate—whether commercial or residential, vacant or improved—a lender’s title insurance policy (“Lender’s Policy”) is crucial to protecting the lender’s interest. Since a lender’s policy can be difficult to grasp, the knowledgeable real estate attorneys at Reiling, Teder & Schrier have provided a blog that provides a helpful overview of lender’s policies.
What is a Lender’s Policy?
A Lender’s Policy ensures that the buyer or borrower owns the underlying real estate, that the owner of the real estate that is the subject of the Lender’s Policy is authorized to give the mortgage, and that the mortgage is a first priority lien on the property (unless the lender is aware that it is taking a lower priority).
With a Lender’s Policy, the title company conducts a search of land records to establish the ownership and lien status of the property being purchased or refinanced. The title company then issues a policy to insure the lender against losses caused by title problems that may have been missed during the title search.
How Much is a Lender’s Policy?
In order to fully protect their interest, lenders must obtain a policy in an amount equivalent to the loan. For example, a lender’s policy for a $250,000 loan transaction should be written for $250,000, even if the purchase price of the property is $300,000. The premium for a lender’s policy is often paid by the borrower as a condition of loan approval.
Why is Lien Priority Important?
As mentioned above, the primary purpose of the Lender’s Policy is to verify the priority of the lender’s mortgage lien.
Priority is particularly important in the case of a mortgage foreclosure where the creditor with the highest priority gets paid first. If an existing lien is missed during a title search, the lender could be left empty-handed in a foreclosure action even if it properly secured its loan with a real estate mortgage.
The title company is tasked with finding any existing mortgages on the property and should require them to be satisfied or released in connection with the closing. The Lender’s Policy then insures against the potentially significant effects of a lien that does not appear on the policy.
What is a Lender’s Policy?
Upon completion of its title search, the title company will issue a commitment (“Commitment”) whereby the title company agrees to issue the Lender’s Policy subject to the encumbrances and other terms and conditions set forth in the Commitment. These encumbrances are often generally referred to as “exceptions.”
Exceptions may include, for example, tax liens, judgment liens, mortgage liens, easements, recorded surveys, and restrictions and covenants of record. The title company is not responsible for compensating the lender for any damages that arise from an exception listed in the Lender’s Policy.
Exceptions to coverage under the Lender’s Policy must be carefully reviewed. In addition to the existing liens discussed above, other exceptions—for example, a building encroachment disclosed in a recorded survey—may pose a concern to the lender. If the encroachment is not discovered and resolved prior to closing (such as by having the encroachment removed or obtaining an agreement from the property owners allowing the encroachment to remain), the title company will not protect the lender if an ensuing dispute over the encroachment threatens the borrower’s interest in the real estate collateral.
What is an Endorsement?
Depending on the nature of the property and the terms of the loan, lenders may elect to add endorsements to the Lender’s Policy. Endorsements are standardized forms attached to a Lender’s Policy that increase or limit coverage and/or remove exceptions, thereby tailoring the policy to fit the needs of the Lender for the specific transaction. A lender’s coverage is determined by the endorsements, and many types are available. It is imperative to carefully review the endorsements because some are effective only after certain underwriting requirements are met.
Endorsements commonly required by lenders include zoning, access, utilities, variable interest rates, and usury, among others.
Zoning endorsements to a Lender’s Policy insure against losses sustained when the property fails to qualify for a particular zoning classification. A zoning endorsement might ensure that certain specified uses will be permitted on the property.
Underwriting requirements for this endorsement may include a review of zoning maps and ordinances, a compliance letter from the zoning enforcement body, an attorney’s opinion, or an owner’s affidavit stating current use and no knowledge of violations.
Access endorsements provide coverage against loss or damage suffered if the mortgaged property does not have access to a public right-of-way.
Utility endorsements provide coverage against loss or damage suffered if the mortgaged property does not have access to public utilities such as water, gas, and electric. These endorsements may be issued upon submission of a current survey of the property certified to the buyer/borrower, the lender, and the title company.
Variable Interest Endorsements
Endorsements for variable or adjustable rate loans insure against the invalidity, unenforceability, or loss of priority of the insured mortgage lien where the loan provisions allow the rate of interest to change.
The usury endorsement insures against loss by reason of the invalidity or unenforceability of the lien due to a violation of the usury laws of a specific state.
Contact Reiling Teder & Schrier, LLC for Assistance
The real estate attorneys at Reiling, Teder & Schrier have represented lenders in construction loans and commercial financing. They are experienced in reviewing policies and advising lenders relating to endorsement coverages and requirements. For help with questions relating to loan transactions and policies, contact Reiling, Teder & Schrier today.
**Reiling Teder & Schrier, LLC is an Indiana Limited Liability Company. The information contained in this website has been prepared by Reiling Teder & Schrier, LLC for informational purposes only, and is not legal advice. The information on this website should not be relied upon to make any decision, legal or otherwise. If you have any specific questions or inquiries regarding any of the information contained in this website, you should consult with an attorney licensed in your state. The information contained in this website pertains only to matters of Indiana law and the laws of other states may be completely different from the laws of the State of Indiana.