Most of us have heard of title insurance. You probably noticed it on your closing statement when you purchased a home with a traditional mortgage. Or maybe it came up when you created or purchased a seller-financed note.
Title insurance is there to protect the chain of ownership, leading to the mindset of “if there’s title insurance, I’m covered.” But when it comes to private mortgage notes, that’s your responsibility. If you’re acting as the bank, you must think like that bank. And banks never close a mortgage without proper title coverage.
Enter an Owner’s Title Policy and a Lender’s Title Policy. Knowing the role of each as a note creator, broker, or investor is critical — and helps protect your note.
Title Insurance Policies to Protect Notes
Unlike homeowners’ insurance, which covers future possible damage to the property, Title Insurance covers past, unknown problems to ownership.
A Title Insurance Policy protects your lien position against defects in a property’s title that existed before closing when the policy was issued. Issues like unknown liens, clerical recording errors, unpaid property taxes, boundary disputes, breaks in the deed chain, or forged signatures.
It is usually purchased at closing with a one-time payment.
When creating a note, this insurance should not be considered optional. You are creating a note secured by real estate; it’s worth the protection — especially if you’d like the option to sell your note down the road.
Owner’s Title Insurance Policy
An Owner’s Title Policy protects the person (or entity) that holds the legal title to the policy. In Mortgage or Deed of Trust situations, that’s the buyer of the property and payor or borrower on the note.
If someone tries to claim ownership of the property or a prior lien challenges the buyer’s title, the policy helps cover legal costs and financial losses (as defined by the policy).
While its point is to protect the borrower in a seller-financed transaction, it also protects you, the lender. If the borrower were to lose ownership, your collateral would disappear. Your note suddenly becomes non-performing.
Lender’s Title Insurance Policy
Note creators and note investors — pay attention.
A Lender’s Title Policy protects the lender’s security interest in the property. Banks get this; you should, too. A Lender’s Policy covers things like:
- the validity and enforceability of your mortgage or deed of trust
- your lien priority position (first vs. second)
- undisclosed prior liens
- recording defects
Coverage generally extends up to the unpaid loan balance and is typically purchased at closing with a one-time fee. Investors will require proof of a Lender’s Policy. No Lender’s Title often means a lower price (to cover the cost of purchasing a new policy). Unknown problems can also crop up when ordering after closing. So, do it from the start!
Best Practices for Creating Notes Professionally
When creating notes, keep a consistent practice — even if you’re creating one note for your family home.
- Utilize a Mortgage Loan Originator (MLO) to qualify the borrower
- Close through a reputable title company or attorney to create documents
- Require a full title search — no shortcuts
- Obtain a Lender’s Title Policy in your name or entity
- Verify lien position before closing and funding
- Ensure the Mortgage or Deed of Trust is recorded promptly
- Keep copies of all closing documents, title policies, and the original promissory note in a safe place
To sum it up: Owner’s Title Insurance protects the buyer’s ownership rights, Lender’s Title Insurance protects the lender’s lien and loan balance. In seller financing, both policies are appropriate and needed; one does not replace the other.
Looking for a thorough overview and guidance on creating notes? Check out our Creating Notes Master Class.
Need resources and contacts for Mortgage Loan Originators, Title Companies, Legal Advisors, and/or other Seller Financing Professionals? Check out our Directory of Note Buyers and Service Providers.
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