Creative financing: You've heard of it, and, as a seller, the idea
sounds pretty attractive. But, do you know everything you need to know about carrying
back a second; essentially, about becoming a lender? You better know the same things
that financial institutions know - you better know about lender's title insurance.
It's time to sell your $150,000 home, a home that you have owned for fifteen years,
a home in which you have substantial equity. The loan terms call for a $20,000 down
payment from your buyer, a new $100,000 loan from a local savings and loan, and
for you, the seller, to carry back a note for the remaining $30,000.
Will you, the seller, need title insurance?
Yes, you will. Everyone who retains an interest in the property needs title insurance.
When you took on the role of lender, you retained a record title interest which
you will want to protect for the term of the loan.
But, why would you need lender's title insurance when the repayment of your loan
is assured by a lien in the form of a recorded deed of trust against the property?
What could possibly go wrong?
You must insure yourself for the same reason that financial institutions obtain
title insurance - for the protection of your investment. You must be assured that
your lien on the property cannot be defeated by a prior lien or other interest in
the property, which, if exercised, would wipe out your security.
Anything that involves the new buyer's ownership rights to the property is of direct
interest to you because you are holding the second mortgage. If such ownership rights
are in question or defective, you may have trouble collecting your monthly mortgage
payments. But, you say, there is nothing in your property's history that could cause
problems: no problems with easements, no problems with boundaries, no problems with
rights-of-way.
Contrary to what may be popular belief, these matters are not the only source of
title problems; a large proportion of title problems arise out of man's interaction
with man. The fact of a marriage, a divorce, a death, a forgery, a judgment for
money damages, a failure to pay state or federal taxes - these occurrences can and
usually will affect your rights as a mortgage lender.
As an example of what can befall the lender, did you know that 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 as well as many others which could jeopardize their loan security
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. Your local title insurance company should
be happy to provide the information you need.
