Title Insurance on a Subject-To: Why You Insure the Full Purchase Price

I want title insurance on the entire property.

Some title companies will offer you less than that on a subject-to, and the reasoning sounds plausible right up to the moment you need the policy.

What Should the Insured Amount Be on a Subject-To?

The insured amount on a subject-to should be the full purchase price. Every time.

Here is the argument you'll hear against it:

On a subject-to you might pay $10,000 cash to the seller on a $300,000 purchase.
The title company proposes insuring the $10,000, because the underlying mortgage is excluded from coverage anyway.

Yes. If a claim relates to the mortgage, it is excluded. That much is true and it is normal, and I covered why in Reading a Title Commitment: What Schedule A and Schedule B Actually Tell You.

But, if some rando pops up and says they have a claim to title, I don't want to be insured for pocket change. I want to be insured against the entire amount, because that claim has nothing to do with the mortgage and it's a valid claim I want covered.

The title company is collapsing two different things:

• The exception covers claims about the mortgage

• The policy covers claims about who owns the property

  Insuring only your cash prices the second one at almost nothing

Why Does This Error Happen So Often?

Title companies default to the cash figure because the numbers on a creative deal don't look like the numbers they are set up to process.

On a conventional purchase, cash-to-seller and purchase price are close enough that nobody thinks about it. On a subject-to they are orders of magnitude apart, and a system that reaches for "the amount being paid" grabs the wrong one.

I’ve seen a commitment come back with a $25,000 insured amount on a $470,000 purchase for exactly this reason. Nobody was being difficult. The file went through a process built for a different kind of transaction.

Which is why this is a checklist item rather than a conversation. Before funds are disbursed, verify the commitment reflects the full purchase price and not a reduced cash-equivalent figure.

PRO TIP: Check the insured amount when the commitment arrives, not at closing. Corrections are routine early and awkward late, and the policy issues off whatever the commitment says.

What Does the Insured Amount Actually Do?

The insured amount caps what you can recover.

Title insurance looks backward. The title company examines the chain of ownership up to your closing date and undertakes to defend or pay on claims arising from before you owned the property:

• Forged deeds

• Undisclosed heirs

• Unreleased liens

• Recording errors

• Defective court proceedings

• Invalid powers of attorney

If one of those surfaces two years in and the claim goes against you, the policy amount is the ceiling on the outcome. A policy written for your cash contribution on a property worth ten or thirty times that leaves you carrying the difference personally.

If any of that is new, What Is Title Insurance? (And Why Creative Finance Investors Can't Afford to Skip It) covers what the policy is doing in the first place.

Worth knowing what a claim costs to fight. At title school I heard underwriters put the average cost of defending a single title claim at roughly $25,000. That is defense alone, before any question of paying out.

Is the Premium Difference Actually Significant?

The premium difference is smaller than people assume, and this is the part that makes the mistake irrational rather than merely unwise.

Title premiums are filed with the state and calculated on the policy amount. They are not a flat percentage, so the premium on the full purchase price is not proportionally larger than the premium on your cash contribution.

Don't guess at it. Ask your title company for the filed rate on both figures for your actual deal, in writing, before you agree to the lower number. In my experience, people who see the two premiums side by side stop having this argument.

What About a Private Lender's Policy?

A private lender's policy is a separate document and a separate question, and it's easy to forget on a creative file.

If a private lender is funding any part of the deal, check that the commitment lists a lender's policy alongside the owner's policy. A lender relying on a security instrument they believe is in second position wants coverage confirming it is actually in second position rather than third or fourth.

There's also a difference between a standard loan policy and a limited coverage junior policy:

• A standard loan policy covers whether the security instrument is valid and enforceable, and whether it holds the priority stated

• A limited coverage junior policy insures a much narrower set of public-record risks

If the question is ever "somebody says my deed of trust is invalid, improperly recorded, or not actually in second position," only one of those two policies answers it. Which policy is pointed at whom is worth being clear on before you sign anything, and that's in Owner's Policy vs Lender's Policy: Which One Actually Protects You?.

PRO TIP: One policy on the commitment doesn't mean everyone is covered. If you see a single policy listed, find out whose it is. An owner's policy and a lender's policy are separate line items, and a lender who assumes they have one when they don't will find out at the worst possible time.

The Takeaway

Always insure the full purchase price. The mortgage exception handles claims about the loan. The policy handles claims about who owns the property, and it pays up to the insured amount, not up to your equity.

Check the number when the commitment arrives. Confirm a lender's policy is listed if a private lender is in the deal. And if a title company tells you your cash contribution is the right figure, ask them what happens when someone with a recorded interest from 1997 turns up.

That's the review we run on every file, because the commitment is where this gets fixed cheaply.

Closing a subject-to? Book a call and we will check the commitment before it becomes a policy. Or send your contract any time to [email protected].

This article is general information, not legal advice. Loan documents, lender policies, and state law vary, and outcomes depend on the specific facts of a transaction. Consult a qualified attorney in the relevant state before acting. Creative Title is a licensed title and settlement services provider in Colorado and Tennessee.

Questions?

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