Comparing hard money and bridge financing against traditional bank loans demonstrates just how different hard money is. But the hard money industry does share some similarities with traditional lending. Take title insurance. Despite the many things that make hard money different, lenders are still very fond of title insurance.
Hard money lenders are free to operate in ways that traditional lenders cannot. They are more flexible and adaptable. They offer more flexibility in rates and terms. In theory, a hard money lender could forgo title insurance should circumstances dictate. But foregoing title insurance is the exception rather than the rule.
More About Title Insurance
Title insurance is a form of insurance designed to protect a lender’s interests. In the hard money space, title insurance protects the lender’s investment by ensuring that the title of the property being acquired is clear and free from any legal defects.
Should legal defects be found in the future, the insurance policy repays the lender. Losses are mitigated and the lender walks away happy. From the borrower’s perspective, title insurance increases the chances of loan approval and makes for a smoother transaction with the seller.
Different Types of Title Defects
Title insurance is a thing because there are different types of title defects that could impact a real estate acquisition. Here are just a few examples:
- Unrecorded liens
- Undisclosed easements
- Tax debts
- Forged documents
- Probate conflicts
On the surface, the property of a title might seem completely clear. All looks to be an order following a standard title search. But after the fact – perhaps weeks or months down the road – a legal defect emerges. Title insurance is designed to protect the lender against losses when such defects are discovered.
Coverage and Term
Actium Partners, out of Salt Lake City, UT, says it is fairly common for hard money lenders to require title insurance. It is purchased by the borrower but covers the lender. Coverage continues for as long as any portion of the loan remains outstanding. Once a hard money loan is paid off, coverage terminates.
In terms of monetary value, title insurance normally covers the amount of the loan principal. It typically doesn’t cover interest. As such, a lender will lose the amount of principal loaned or the fees charged for its service. But the lender also will not make any profit on interest.
Title Insurance for the Borrower
Although lenders do not require it, borrowers can purchase title insurance to protect themselves as well. The insurance protects against losses created by title defects that don’t emerge until well after the transaction is completed.
Borrower title insurance can mitigate potential losses from investments made in a property prior to legal defects being discovered. For example, a borrower might put significant money into rehabbing the property in question. There is also the issue of equity. A borrower obviously wants to protect any equity built up over time.
One of Many Strategies
Requiring title insurance is one of many strategies hard money lenders rely on to mitigate risk. They need every strategy available to them, given the risky nature of hard money lending. By requiring title insurance, lenders reduce their risks of significant financial loss should problems with a title emerge at a later date.
If you are considering applying for a hard money loan, don’t be surprised by a title insurance requirement. The property you are attempting to acquire will act as collateral for the loan. Title insurance simply guarantees that your lender’s risks are mitigated even if the collateral is jeopardized by the previously undisclosed title defect.