WHAT DOES A LENDER’S POLICY INSURE?
A loan policy insures a lender’s lien position. Lien position is based on all of the liens affecting an insured property. That is, a judgment or tax lien recorded today would have a higher priority than a mortgage recorded tomorrow. Therefore, to insure “first” lien position, a title insurer must discharge all existing liens encumbering the property and address potential liens that could attain a higher priority by operation of law (e.g., mechanics’ liens).
A title insurer does not necessarily insure first lien position. If a borrower has two or more secured loans, only one can be insured in first position. A loan policy insuring second position assures that lender that upon foreclosure, there would be only one lien of higher priority.