How title insurance works with seller financing

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07/24/2015 | Author: Editorial Staff

My client is purchasing a property by means of seller financing. I know that lenders require a mortgagee, or lender, title insurance policy to protect the lender from any problems with the title, but would the buyer in this case still have to provide a mortgagee policy to the seller?

Yes, if you're using the TREC contracts. Paragraph 4C of the TREC contracts state that if an owner policy of title insurance is furnished to the buyer in a seller-financing transaction, then the buyer has to provide the seller with a mortgagee policy of title insurance.

Read more legal FAQs on texasrealestate.com.

Categories: Forms, Legal
Tags: legal, legal faq, trec form, seller financing, financing, title insurance, forms


Comments

Mike McEwen on 07/31/2015

In the example you just cited the seller’s lien is superior.  The only lien superior to his are property taxes.  If there is a homestead involved some liens are of no force and effect whatsoever.

Laurie on 07/31/2015

There are certain liens or judgments that the buyer may have against them; and if the seller decides to foreclose or sell the loan these items could affect the process of the foreclosure.  Best to obtain the Lender Policy to insure the lien.

Jack Gillis on 07/30/2015

Certainly a seller’s choice, but it is more risky.

Mike McEwen on 07/30/2015

Just sounds like a real stretch to me.  Don’t mean to sound naïve but it we just do not do mortgagee´s policies on seller financing.

Jack Gillis on 07/30/2015

Mike, it insures that the seller has a good lien to secure his note that he is carrying on seller financing in the event something was not properly recorded.

Mike McEwen on 07/29/2015

I know they two policies serve different functions, but then the seller is the lender what difference does it make?  I would like a specific example.

Mike McEwen on 07/29/2015

What kind of priority could there be that would affect the seller.  The only line superior to the seller’s is property taxes and that is a no brainer to remedy.  I would like to see a good, specific example.  I am not claiming to be an expert.

Matt on 07/29/2015

Mike’s initial response demonstrates a misunderstanding of the purpose of the title policy/title insurance, which is common throughout the industry. A Loan Title Policy does not simply insure a “clear title.” It insure the validity and priority of the lien. With no title policy, if the seller attempts to later foreclose on the lien and there is some issue (not necessarily related to the title of the property), the seller would have no protection. It may not happen that often, but for only an additional $100, it makes sense for the seller to go ahead and obtain the protection. Also Frank brings up valid points about the seller attempting to later sell the note.

Bill Bradshaw on 07/29/2015

Mr. Weeks is correct. The loan policy and the owners policy have very different functions. Lenders require this protection for a reason. Beside the cost of a loan policy is just $100 in the scenario described. We would all like to have an extra $100; but, in the context of a real estate transaction that is not much

Franks Chambers on 07/29/2015

Should the seller/noteholder/lender find it necessary to “cash out” or sell the note, any institutional lender, or company that buys notes like that, would require title insurance.  If there is not an existing loan title policy the seller obtained at the time he made the loan to his buyer, he would have to pay for a new loan policy at the time of the note sale.  That policy would be issued at full premium for the amount of the note, whereas, if the policy is obtained at the same time as his buyer got his owner’s title policy, the additional premium would only be $100 (plus any endorsements).

Mike on 07/24/2015

That part is a no brainer.  Why insure title to the seller if he already acquired the property w/ clear title?

Richard Weeks on 07/24/2015

They insure two different things. the owners policy insures the owners title. The loan policy insures the validity and priority of the lenders lien.

Mike McEwen on 07/24/2015

I respectfully disagree.  While you are legally and technically correct, there should be a contractual and lawful way to avoid that.  Why should the person financing the property, who is giving insured title to the property have to have a mortgagor’s policy.  What could go wrong?  If I am missing something, please set me straight.  What would be a valid reason for having to provide a mortgagor’s policy?


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The material provided here is for informational purposes only and is not intended and should not be considered as legal advice for your particular matter. You should contact your attorney to obtain advice with respect to any particular issue or problem. Applicability of the legal principles discussed in this material may differ substantially in individual situations.

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