Creative Financing

Creative Financing: Why Sellers Carrying a Second Mortgage Need Lender’s Title Insurance

Creative financing—specifically, carrying back a second mortgage—sounds attractive, but as a seller-turned-lender, you need to understand the same risks financial institutions face. That means you need to know about lender’s title insurance.

Why You Need Lender's Title Insurance

When you carry back a note, you retain a record title interest—a lien (in the form of a recorded deed of trust) on the property. Everyone who retains an interest in the property needs title insurance to protect their investment.

You must insure yourself for the same reason a financial institution does: to protect your investment. You must be assured that your lien on the property cannot be defeated by a prior lien or other interest that could wipe out your security. Anything that affects the new buyer’s ownership rights is of direct interest to you, the second mortgage holder, because defective ownership rights could jeopardize your ability to collect monthly payments.

Sources of Title Problems

While you may assume your property is safe from issues like easements or boundary problems, a large proportion of title problems arise from man’s interaction with man. These occurrences can and usually will affect your rights as a mortgage lender:

 

• A marriage, a divorce, or a death
• A forgery
• A judgment for money damages
• A failure to pay state or federal taxes

As an example, a federal tax lien recorded against your buyer before the loan transaction is concluded may result in the loss of security in your home. Sophisticated mortgage lenders are aware of this possibility and seek the protection afforded by a lender’s title insurance policy.

If you are considering carrying back a second, be sure to get all the facts regarding the benefits of lender’s title insurance from your local title insurance company.

Article by CLTA