Denied but Determined: The Battle for Title Coverage Beyond Loan Value

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Picture this: After a long negotiation process, you’re finally ready to close your loan. You understand the potential for the indebtedness to be greater than the insured amount so, on your attorney’s advice, you require a Lender’s ALTA policy in an amount that is 125% of the loan amount, to allow for a larger claim payment and limit financial loss.  All your documents are executed and sent to escrow.  You’re at closing and title has thrown a curveball where they won’t give you the policy you want, and you need to find a way to close the transaction.  Now what?

This article will discuss practical considerations and strategies to implement when the title company refuses to issue a 125% policy.

Do Your Homework

First things first, be sure to choose the right title company for your needs ahead of time. Also, remember that whichever title company that is selected by the Borrower needs to meet your standards, in this case, providing 125% policy coverage.  Insuring an amount greater than the property’s value does not necessarily align with the company’s standards and, as a result, the title company may simply refuse to insure for more than the face value of the loan. Depending on your specific circumstances, as explained below, if you don’t determine whether a title company will consider a request for 125% policy coverage well before closing, you may need to find another title company and delay closing.

Consider the Reasons and Negotiate

Once you’ve determined that the title company routinely issues 125% policies, the next step is to understand and consider the reasons for the denial. Ask for a clear explanation as to why they are refusing to provide the requested coverage amount. You will need to request specific details about the title issues or risks they have identified that are causing their reluctance. A denial may also indicate that there are significant risks associated with the property’s title that the title company is unwilling to cover. 

Make sure to obtain and carefully review a copy of the title report to identify any potential issues before closing. If you spot any errors in the report, bring them to the attention of the title company. If there are specific title issues identified by the title company, work with your attorney to resolve them. This may involve clearing outstanding liens, resolving disputes, or taking legal action if necessary.

If you believe the title company’s denial is unfounded or based on incorrect information, you can try to negotiate with them by providing any additional evidence or documentation that supports your position and addresses their concerns.

Consider the Loan Type

Amortizing Loan v. Interest-Only Payments

An amortized loan is a loan that follows an amortization schedule of equal monthly payments which means that the loan’s balance will be paid in full by the maturity date since the outstanding principal balance gradually decreases over time as payments are made. As the loan amortizes, the coverage amount becomes more aligned with the property’s value. Therefore, a 100% loan value policy on an amortized loan is more likely to sufficiently ensure that the lender’s interest is adequately protected throughout the loan repayment period. By contrast, the lender bears far greater risk on a loan that requires interest-only payments, and the extended 125% coverage provides a higher level of protection beyond the principal balance to account for other instances of indebtedness, such as protective advances and accrued unpaid interest. If title refuses to insure 125% on a simple interest loan, it may be best to find another title company willing to extend the requested coverage.

Commercial v. Consumer

Since the title company may not be familiar with the specific nuances between commercial loans and residential loans, request to speak with a senior underwriter and find out what would be required to obtain approval. A senior underwriter will understand that insuring an amount equal to or slightly higher than the loan value aligns with a commercial lender’s interest in safeguarding the loan by ensuring that the lender is protected from any financial losses related to issues such as uncovered losses.

Explore Alternative Options

If resolving the title issues seems challenging or financially burdensome, you may need to consider a different insurance approach.  This could involve renegotiating the terms of the loan or considering other alternative risk mitigation strategies such as obtaining supplemental title insurance to cover the difference between the loan value and the offered coverage. These options provide some level of protection to lenders but may not offer the comprehensive coverage of a standard title insurance policy. Discuss these possibilities with your attorney or a trusted insurance professional.

Important Tips:

  • Before closing, determine whether title will extend 125% coverage.
  • If title won’t give you the policy you want, ask why the coverage was denied and consider the reasons. Ask whether you are able to remedy outstanding issues to the title company’s satisfaction.  
  • Contact other title companies and explain the situation.  
  • Ask for any alternative solutions.

Every situation is unique and the steps you need to take may vary depending on the specific circumstances. Consulting with legal professionals who specialize in real estate and title matters is crucial to understanding your rights, obligations, and available options when dealing with a title company’s refusal to insure your property above the loan value.

The Banking and Finance Team at Geraci is well-equipped to help you navigate all your closing questions. Contact us today.

Questions about this article? Reach out to our team below.