Is
it better to get a binder or a policy at closing on loans with a construction
phase and a permanent or mini-perm phase?
Both
have advantages. Although a binder does not provide title insurance coverage,
it does allow the lender or borrower to purchase a mortgagee policy in the
future, subject to the conditions stated in the binder. By allowing a binder
during the construction phase, closing costs at the initial closing are less,
but may be higher in the long run. But since most mortgagee policies cannot
be increased, if a policy is purchased at loan closing and the loan amount
is increased during construction, the customer will have to purchase a new
policy. The cost of purchasing a new binder if the loan increases, is minimal.
Many lenders give the customer a choice of initial purchase with the loan
documents stipulating that if a binder is purchased, a mortgagee policy must
be purchased at the permanent or mini-perm phase. One other thing to note
is that a mortgagee policy is insuring the validity (if not the priority)
of the lender’s lien. A binder does not insure the validity of the lien
on homestead properties unless the Schedule C exception relating to early
start of construction is deleted. So it is imperative for lenders, in their
closing instructions, to require the title company to delete the early start
exception.
If
the lender allows a binder for the construction period, when is the mortgagee
title policy purchased?
At
completion of construction, after the appraiser’s final certification
has been obtained, after the loan proceeds are fully disbursed, and when the
title company is in a position to issue a mortgagee policy without exceptions
for mechanic’s lien affidavit filings.
If
a lender gets a policy at construction loan closing, what must be done to
get a clean policy at permanent or mini-perm phase?
A
construction mortgagee title policy contains exceptions for pending disbursements
(meaning the insurance coverage only extends to funds actually advanced),
and mechanic’s lien exceptions (in Texas title insurance does not cover
the risk of loss to lenders for lien affidavits filed by unpaid subs and suppliers
after the date of the policy). Upon completion of construction, the lender
should require the title company to issue a T-3 endorsement deleting the pending
disbursements exception and the mechanic’s lien exception, and recertifying
that the survey deletion endorsement is effective as to the new improvements
(the latter requires an updated survey showing the new improvements).