Lender's title insurance in a family loan

13 Replies

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

@Rob Redcay

I know your country invented the beast that is title insurance ... which has been imported into my country in the past decade+ ... it's cost effective in that it has become a way for lawyers to spend less time researching title (viz.  We could send someone over to the archives to search the title books which have not been imported into the electronic Land Registry, but it would be far cheaper for you to shell out $300 for title insurance).

Most commercial lenders here now mandate you purchase a lender's policy.   Some private lenders may also insist you carry a lender's policy - which is not necessarily a bad thing.  However, do verify that the policy you are considering is applicable to a private lender and does not stipulate the lender be licensed (we bumped into this ... it was a surprise to everyone, including the title insurance agent with whom we were dealing).

Sounds like there is no "behind the scenes" -- your parents are lending the money and taking a security interest in the property like any other lender would.

If you compare the terms of an owners policy vs. a lenders policy, you will see that although they look alike in many ways, they cover two completely different things. 

Your lender should consult with an attorney -- now is not the time to take advice from the borrower!

Thanks @Tom Gimer: That they're "different" is about as much as the Title people could tell me. When I asked them for any examples of how they're different or for any examples of when that difference would make any material difference to my parents and me, they could not help me (despite the fact that they're trying to sell me nearly $1,000 of their product). Clearly the policies are different in some way. Clearly one protects just the owner whereas the other protects just the lender. However, for me and my parents, I'm still not seeing any actual advantage of the lender's policy in addition to the owner's policy. There very well may be an advantage but it's yet unknown to me after having asked the title insurance company or doing about 2 hours of cursory internet research. Hoping somebody here can shine some light. Thanks!

@Rob Redcay I'm purposefully trying not to give you an opinion but rather a suggestion that professional advice be pursued.

Are you the only child? Happily married? Gainfully employed? What's the history of the property? Hopefully some others will chime in here with issues or hypotheticals to consider that might be worth considering. This is not a simple issue of yes or no. Insurance is about risk. 

@Rob Redcay

As Tom has alluded, business is business and family is family.  The Bank of Mom & Dad should be viewed as a different entity than the folks who raised you, invite you home for holidays and pressure you to produce grandkids.

It is most prudent - and may be legally required, depending where you are -  that both you and your lender have independent counsel.   

@Tom Gimer . Right on. I appreciate your input and I understand that it's not always prudent to give advice without knowing the details. From what I do know, a lender's title insurance policy protect the lender's loan from defects in the title -- e.g. a lien not found by the title company, a dispute in the property line, or an heir of a previous owner with a claim to the property. I don't think that my credit profile or risk profile as a buyer will factor in to any of that, but here goes: I'm married, have one sister. My wife and I own a small business and I'm starting a technology company. I've had a 15+ career as a professional and have assets > value of the loan. My wife and I each have excellent credit.

The property we are buying has been in the same family since 1951. The original owners (parents) passed decades ago. A son was living there, but then property was transferred to his sister who is the seller. Title shows just a small lien (for a tax bill) which will be paid in escrow.

Hope this helps. Really looking for any generic information about how a lender's title insurance policy could protect my parents and me collectively in some way beyond the owner's policy that I will have. Thanks, all!

@Roy N. That's a good way to look at it. The thing that is frustrating me is that, if understanding the ins and outs of this purchase requires even one of us (and especially both os us) to consult with an attorney, we've probably spent more in dollars and our time than the cost of the policy to begin with. It seems then that the only reasonable thing to do is to "just buy it." It bugs me that there's an $800 product that we're effectively being made to buy just because there's so little information about it and, as you alluded to in your first reply, it's become status quo and probably means a less thorough search by the title company to begin with. It stinks. It also stinks that the people selling it cannot give a good reason to buy it. Imagine any other product that is $800 and the salesman cannot tell you clearly what the value is! (Sorry if I'm ranting but hopefully you guys understand where I'm coming from!)

Many of the worst title claims involve things that cannot be gleaned from the public records.

Just the other day we received notice of a claim from a private lender who re-recorded a deed of trust 9 years after it was originally executed... but with a new legal description. The recording occurred after the good-through date of our search but before our closing and recording.

A couple months back we lost a closing to another title company. The parcel was landlocked due to the state taking a portion of land which our parcel previously had access through. Our survey identified the problem. One of our requirements was to obtain an easement with the state. They initially cooperated but the buyer and agents became extremely frustrated with the delay and eventually took the deal elsewhere -- of course they didn't disclose the issue to the next title company.

Just the other day on this very site several of us were analyzing a title report trying to determine the priority of a mortgage that was foreclosing. The prior owner had structured financing in such a way that lenders would not have been aware of each other... doc dates vs. recording dates were all overlapping. All were still showing as unreleased.

Last month we had a deal where a wholesaler unwittingly had a tax lien filed against him. He never took title to the property. However, the lien attached because his equitable interest was identified in the prior deed. 

These are just examples of things I've seen recently that occur that can affect title, mortgage priority...

@Rob Redcay , here it goes. I'm not a title expert, and @Tom Gimer has suggested you and/or your parents speak with an attorney.

The lender's title policy protects the lenders interests. The owner's policy protects the owner's interests. In your situation, it may seem like a wasted $800, because right now, you and your family have a great relationship.

But family is family, and if your family doesn't have just a touch of crazy somewhere in there, then I want to come over to your house for Christmas. (My family  is coming to my house this year and there's way  more than just a touch of crazy in my family.)

I don't believe you can get title insurance after the fact. You get it at closing or you don't get it, is my understanding. (Tom, correct me if I'm wrong.)

Let's move down the road a few hypothetical years. You have a sister. Maybe she gets mad that you have borrowed money from your parents, and they pass away. She takes up some sort of legal fight against your property that your parents estate isn't covered against. That $800 will seem like a bargain at that point.

Also, before you close, you want to make sure to get everything in writing - especially since it's your parents. Thinking they expect one thing, when they expect something completely different can - and has - ruined many families.

Your parents are giving you a generous gift. Buy the policy for them as a way to say thanks.

@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.

Thank you @Jon Holdman and @Mindy Jensen

I really appreciate everybody's input on this.

There's a misconception in this thread that this is my decision. It's not. My dad is an attorney and not a passive player with anything he does. As the lender, he'll make the call on buying the policy. However, as some of you have guessed, we're a close family and since I've been the one mostly in the details of the transaction, I'm interested in understanding the details and representing the situation clearly to my dad. Also, frankly, I've gotten poor service from the title company. They're also the ones selling the insurance and I'd rather not throw money at them if I don't have to.

Jon's hypothetical scenario is the first time I've heard a scenario that demonstrates any value of the lender's policy vs the owner's policy in our case. Thank you! I get it now.

We have enough info now to make a decision. Thanks again to everybody.
Originally posted by @Mindy Jensen :

@Rob Redcay , here it goes. I'm not a title expert, and @Tom Gimer has suggested you and/or your parents speak with an attorney.

The lender's title policy protects the lenders interests. The owner's policy protects the owner's interests. In your situation, it may seem like a wasted $800, because right now, you and your family have a great relationship.

But family is family, and if your family doesn't have just a touch of crazy somewhere in there, then I want to come over to your house for Christmas. (My family  is coming to my house this year and there's way  more than just a touch of crazy in my family.)

I don't believe you can get title insurance after the fact. You get it at closing or you don't get it, is my understanding. (Tom, correct me if I'm wrong.)

Let's move down the road a few hypothetical years. You have a sister. Maybe she gets mad that you have borrowed money from your parents, and they pass away. She takes up some sort of legal fight against your property that your parents estate isn't covered against. That $800 will seem like a bargain at that point.

Also, before you close, you want to make sure to get everything in writing - especially since it's your parents. Thinking they expect one thing, when they expect something completely different can - and has - ruined many families.

Your parents are giving you a generous gift. Buy the policy for them as a way to say thanks.

Just saw your question in there, Mindy.

You can get title insurance later... but it requires another title search and examination to take place. Plus, a request for title insurance after closing is a big red flag that there is in fact a title problem. 

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