Title Insurance

In hard money lending, lenders are primarily interested in protecting their collateral property. In doing so, they protect their investment and ensure they’ll be able to recoup losses in the event of a default. 

Title insurance is one of the many ways a lender guarantees a borrower’s collateral property retains its value throughout the duration of their hard money loan. Read on to learn all about this type of insurance, what it covers, and how it relates to hard money loans.

Title insurance is a type of property insurance that protects a property’s title and ownership. In the event that property ownership issues lead to financial loss, title insurance compensates 

Title insurance protects against a range of ownership issues including: 

• Records errors: Losses related to incomplete or inaccurate property ownership records
• Ownership disputes: Challenges to property ownership from people who may have previously had an interest in the property 
• Unknown liens: Unpaid debts from previous owners that weren’t revealed during the sale 
• Fraud: Forged deeds or ownership documents 
• Permits concerns: Costs that arise from past owners renovating without permits 

When a property is used to secure a hard money loan, the lender has just as much stake in the property as the property owner. In the event that the loan goes into default, the collateral property is a lender’s primary tool to recoup their losses. Because of this, most hard money lenders require borrowers to carry title insurance on their collateral property. Without title insurance, costs that arise due to title concerns jeopardize the property’s value and the lender’s investment. 

When a property owner requests title insurance, the title company first conducts a title search to identify and remedy any pre-existing title issues. Once the title is cleared, the title company issues a policy. From there on out, the company helps with any covered ownership issues that arise. 

See title insurance in action in these real-world scenarios.

A real estate investor takes out a hard money bridge loan to purchase a new investment property before selling an existing property. After the loan is issued, a past business partner comes out of the woodwork and claims to be a part owner in the collateral property. 

The investor’s title insurance pays for legal defense to prove the business partner has no claim to the property. The dispute is settled, the property is sold, and the investor pays off their hard money loan. 

A property rehabber uses a hard money loan to purchase a fix-and-flip property. The purchase goes smoothly and the rehabber begins renovations. Partway through the process, they discover that extensive work done by the past owners was done without a permit. The cost of remedying the work threatens their profit on their home and therefore their ability to pay back their hard money loan. 

They submit a claim with their title insurance. Insurance pays to fix the non-permitted work. The owner finishes renovations, successfully sells the property, and pays off their loan.