Title Insurance on Construction Loans

Monday, August 20, 2007
Contributed by: James Wester and Wade King

Relatively recent changes in the myriad of rules and regulations governing the issuance of title insurance policies in Texas have forced a change in the way that lenders insure liens securing construction loans.

In the past, many lenders purchased a Mortgagee Title Policy Binder on Interim Construction, at very little cost, to insure such liens, which resulted in delaying the cost of full coverage for the policy that insured the lien securing the permanent loan. This type of binder is now available only when the borrower is both the landowner and the original contractor. Since this is an atypical situation, the effect of these changes is to require lenders in most situations to purchase a Mortgagee's Policy of Title Insurance at the applicable Basic Premium Rate when the construction loan is initially issued.

If the construction loan is also the permanent loan, the initial policy should be issued with coverage exceptions for pending disbursements and mechanics liens, each of which may be removed as exceptions to the policy at no charge by obtaining a Completion of Improvements Endorsement following the completion of the construction.

The "good news" for borrowers, who typically pay the cost of the insurance premiums, is that in situations where the construction lender is not the permanent lender, the permanent lender may insure the lien securing the permanent loan by purchasing a Mortgagee's Policy of Title Insurance at a discounted rate equal to the greater of:

  • the current minimum Basic Premium Rate (currently $237), or
  • if the amount of the permanent loan exceeds the amount of the construction loan, the difference between the Basic Premium Rate of the policy insuring the lien securing the construction loan already purchased, and the Basic Premium Rate which would otherwise apply to the policy insuring the lien securing the permanent loan.

This column is published for informational purposes only. It should not be construed as legal advice and is not intended to create an attorney client relationship. The views expressed are those of the author and do not necessarily reflect the views of the author's law firm or its individual partners.