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March 1, 2017

Best Practices: Obtaining Sufficient Title Insurance on Your Construction Loan

by Michelle Sergent Kaas

Whether you are closing a conventional loan or a SBA loan, you want to make sure that you obtain sufficient title insurance coverage when financing a construction project.

First and foremost, you need to instruct your borrower to neither commence construction nor to file a notice of commencement until after the lender’s mortgage/deed of trust has been recorded.  Commencing construction and/or filing a notice of commencement prior to the recording of your mortgage/deed of trust, can jeopardize the priority of your lien as a mechanic’s lien in favor of a contractor can trump the lien of your mortgage/deed of trust.  If your borrower does commence construction prior to the loan closing, you will have a difficult time getting the title company to remove the mechanic’s lien exception from your title policy.  Although some title companies can remove the mechanic’s lien exception if the owner executes an indemnification agreement and provides lien waivers from the contractors on the project, there is no guaranty that this will necessarily occur.  It is therefore imperative that you instruct your borrower to not commence construction until the lender has given express approval to do so.

Lenders should request gap coverage to cover the lender for the period of time from the title search through the date of the issuance of the title policy, and “date-down” endorsements for each subsequent disbursement of the loan.

In addition, you should request the following endorsements on the title insurance policy for your construction loan:

ALTA 8.2-06 (environmental protection lien):  ALTA 8.2-06 protects the lender from loss occurring as a result of any environmental liens recorded in the public records.

ALTA 9.0-06 (restrictions, encroachments, minerals):  ALTA 9.0-06 protects the lender from, inter alia, loss occurring from violations of restrictions (other than those disclosed), encroachments across property lines (other than those disclosed) and damage to improvements caused by the exercise of easement rights or mineral interests.  A survey acceptable to the title company may be required to obtain this endorsement, so consult your title agent early in the loan process to determine if a survey is necessary as the survey could take weeks to obtain.

ALTA 14-06 (future advance):  ALTA 14-06 protects the lender from, inter alia, loss of priority of future advances made pursuant to the loan agreement.

ALTA 17-06 (access endorsement):  ALTA 17-06 protects the lender from, inter alia, loss occurring from limitation to the right of access from the insured land to a public right of way.  A survey acceptable to the title company may be required to obtain this endorsement, so consult your title agent early in the loan process to determine if a survey is necessary.

ALTA 32.2-06 (construction loan- loss of priority):  ALTA 32.2-06 protects the lender from loss of priority to mechanic’s liens due to the periodic disbursement of the construction loan.  The title company will most likely require an indemnification agreement from the owner, paid invoices and lien waivers to protect the priority of the disbursements.

ALTA 33-06 (disbursement):  ALTA 33-06 is usually issued in conjunction with ATLA 32.2-06 and protects the lender from loss of priority of the disbursements.  The endorsement is issued during construction and extends the date of coverage.  The endorsement will only be issued after a new title search reveals that no mechanic’s liens or notice of mechanic’s liens have been filed.

For more information on obtaining sufficient title insurance for your construction loan, please contact Michelle at 267-470-1167 or at mkaas@starfieldsmith.com.