Lender Title Insuranc is the insurance policy a mortgage lender counts on to protect itself from any problems that may arise from a property’s troubled past history that did not come to light in the initial title search prior to the sale of the property/
A title company engaged at the time of purchase will conduct a complete search of all public records associated with a property that is up for sale. If no problems are found at the time of the search, the title is considered clear and the purchase will continue. A mortgage lender relies on a title being clear before they agree to provide the funding for the transaction.
If, however, the title search has missed something or a problem comes up after the purchase affecting the title (an unsatisfied contractor’s lien on the property or an outstanding tax bill, for example), the Owner’s Title Insurance Policy protects the buyer from legal fees and losses and the Lender’s Title Insurance Policy
does the same for the mortgage lender.
The Lender (or Loan) Title Insurance Policy is therefore a policy assuring the mortgage lender (who also has great financial interest in the property being sold) that their institution will also not be impacted by undisclosed title problems discovered after the title search. This policy covers the lender for the amount of the loan and declines
accordingly as the loan is paid off. Most lenders require a Lender Title Insurance Policy as security for their investment in real estate, just as they may require fire insurance or other coverage on the property up for sale.
American Land Title Association has answers to many questions about Lender Title Insurance.