15. What does title insurance do?
Just as in the context of residential real estate, title insurance protects the insured, who can be the property owner and/or the mortgage lender, from loss due to undisclosed defects in title to real property and, for creditors, from loss due to the invalidity or unenforceability of its mortgage lien. Title insurance will defend against a lawsuit attacking the title as it is insured, or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy. Most policies contain a number of exceptions to the insurance policy, either specific exceptions for recorded liens, or general exceptions for issues the policy does not cover, including defects known to the insured, arising out of governmental documents not otherwise recorded, or arising out of creditors’ rights. Most title policies insure the title against both recorded and unrecorded claims, subject to stated exceptions. Coverage for unrecorded risks is beneficial because of the difficulty or impossibility of ascertaining all such risks. Many states have rating bureaus that regulate the types of policies, policy endorsements, and rates that apply to title insurance in a given jurisdiction. A creditor usually will require title insurance to insure the lien of its mortgage. Depending on the type and characteristics of the property and the loan, the creditor may also seek certain endorsements to the title policy covering a particular risk of concern to the creditor, such as insolvency. Those endorsements will affect the pricing for the policy. Endorsements may insure a whole variety of risks, including but not limited to zoning, usury, environmental liens, mineral rights, and other matters too numerous to list here. Certain endorsements are also only available in certain states or for certain types of properties or loans.
A deed of trust with assignment of rents is the document that underlies the loan on a rental property. The lender's security interest in the property gets created by the deed of trust. The assignment of rents puts teeth in the lender's security interest by giving it the right to collect rents.
The Deed of Trust
Most loans in California are securitized by deeds of trust instead of mortgages. When you take out a loan, you sign a promissory note. The note is a private business arrangement between you and the lender. The deed of trust sets up an arrangement by which the actual ownership of your property sits with an impartial third party, called a trustee. If you, as trustor, fulfill your obligations under the note, the trustee will transfer the deed to you. If you don't, the lender, or beneficiary, can have the trustee transfer ownership of the property to itself.
Assignment of Rents
The assignment of rents clause in the deed of trust gives the lender the right to collect any rents that the property generates if you don't make your loan payments. Having an assignment of rents clause is important for the lender. Leases are technically agreements between you and your tenants. Without your permission, your lender might be unable to collect the rents from the tenants.
Deed of Trust vs. Mortgage
Deeds of trust are differnet from mortgages in one key way. Mortgages have two parties -- you and your lender. Deeds of trust have a third party sitting in the middle. Because of this, foreclosing is much easier. California trust deeds typically do not have a period of redemption, making it possible for your lender to complete the foreclosure process in just a few months.
If you don't want to give your lender a security interest in your property and in your rental income stream, you probably won't be able to use its money to buy the property. You can buy the property with all-cash. Alternately, you could take out unsecured financing, such as a line of credit, or take out financing secured by a different asset.
About the Author
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.
- Stockbyte/Stockbyte/Getty Images
Suggest a Correction