Hawaii Pre-Licensing National Practice Exam

What does a lender's title policy protect against?

1. Existing undiscovered title defects

2. Property tax increases

3. Funding for property renovations

4. Market fluctuations

The correct answer is: Existing undiscovered title defects

A lender's title policy is specifically designed to protect lenders against existing undiscovered title defects that may arise after the loan has been issued. These defects can include issues such as liens, encumbrances, or other claims against the property that the buyer was unaware of at the time of purchase. If such defects are later discovered, they could jeopardize the lender’s security interest in the property, making the lender more vulnerable to loss. The policy provides a safeguard by ensuring that if any of these undiscovered issues come to light, the title insurance will cover the losses incurred, allowing the lender to recover financial losses associated with enforcing their rights against the property. This protection is crucial for lenders, as it helps to ensure that they maintain a secure position on the loan backed by the value of the property. In contrast, property tax increases, funding for property renovations, and market fluctuations do not fall under the protection offered by a title policy, as these issues relate more to the overall economic and market conditions or personal investment decisions rather than the legal title status of the property itself. Thus, while those factors might impact a homeowner or an investor, they do not pertain to the specific coverage provided by a lender's title policy.