You’ve heard of creative financing—and if you’re a seller with substantial equity, the idea of “carrying back a second” might sound especially attractive. But before you step into the role of a lender, there's one essential thing you need to understand: lender’s title insurance.
Let’s say you’re selling your $150,000 home, which you’ve owned for 15 years and in which you’ve built significant equity. A buyer offers $20,000 down, secures a $100,000 loan from a local savings and loan, and you agree to finance the remaining $30,000 yourself. Now you’re a lender—congratulations! But along with that role comes responsibility, and risk.
Do You Still Need Title Insurance?
Yes, absolutely. Everyone who retains an interest in a property should be protected by title insurance. By carrying back a second mortgage, you’re no longer just the seller—you’re also a lienholder. And that lien—secured by a recorded deed of trust—needs protection.
But Isn’t a Recorded Deed of Trust Enough?
Not necessarily. While recording your interest creates a lien on the property, it doesn’t guarantee that your lien is safe from other claims. There could be undisclosed prior liens, defects, or interests that may take priority over your second position—even wipe it out entirely.
This is precisely why traditional lenders always require title insurance before funding a mortgage. You should do the same.
What Could Go Wrong?
Even if you’re confident there are no issues with your property—no boundary disputes, no access issues, no unpaid contractors—problems don’t always originate from the land itself. Most title issues arise from human circumstances, such as:
- Divorce or marital disputes
- Undisclosed heirs
- Tax liens (state or federal)
- Judgments from lawsuits
- Fraud or forgery in past transactions
- Recording errors or missing signatures
For example, if your buyer has an undisclosed federal tax lien recorded before the sale closes, and you’re not protected by a lender’s title insurance policy, your $30,000 security interest could be wiped out.
Protect Your Investment
When you carry a second mortgage, your ability to get paid depends on the buyer's ownership rights being secure. If their title is questioned or defective, your monthly payments may stop, and your legal ability to collect could be in jeopardy.
Professional lenders know these risks well—and they never proceed without title insurance coverage. You shouldn’t either.
The Bottom Line
If you're considering seller financing, especially in the form of a second mortgage, be sure to speak with a title insurance company. Ask about a lender’s title insurance policy for your loan. It’s a small investment for the peace of mind that your financial interest is protected.
In creative financing, the most “creative” thing you can do might just be the smartest: think like a lender.
