As part of an ongoing process of managing underwriting risks and refining underwriting guidelines, Stewart Title Guaranty Company has revised our guidelines for underwriting construction loan title insurance policies in Maryland.
Construction loans in Maryland enjoy priority over subsequently filed mechanic's liens based on the provisions of MD Real Property Code Annotated §7-102(b) which establishes the priority of a mortgage that secures future advances over any later recorded liens as of the effective date of the mortgage.
Given the priority that future advances are afforded in Maryland for construction loans, the following guidelines apply when insuring construction loans in Maryland.
The General Mechanic’s Lien Exception
The general mechanic’s lien exception for “Any lien or right to a lien, for services, labor, or material heretofore or hereafter furnished, imposed by law, and not shown by the Public Records.” may be removed from loan policies insuring construction loans upon compliance with the following requirements:
- Confirm that the mortgage secures future advances;
- Confirm that construction will not begin until after the insured mortgage is recorded;
o If construction has begun before the insured mortgage is recorded, please seek underwriting approval before removing the general mechanic's lien exception.
Pending Disbursement Clauses/Endorsements
Although a pending disbursement clause is not required when insuring construction loans in Maryland, a pending disbursement clause may be used in any MD construction loan policy. If a pending disbursement clause is used, please use PDCX08.
If an Owner’s Policy is to be issued at the time of the construction loan and the owner requests a policy for the full fair market value of the property after improvements are completed, the Owner’s Policy should contain a pending improvement clause:
- Liability under this policy is limited at Date of Policy to $ (purchase price of property, or value of land at date of closing). Liability shall increase as contemplated improvements are made so that liability under this policy shall be limited to that sum plus the amount actually expended by the Insured in improvements in good faith and without Knowledge of any defects, liens, or encumbrances on the Title at the time that the expenditure occurs. In no event shall the liability of the Company hereunder exceed the face amount of this Policy. Nothing contained in this paragraph shall limit any exception or any printed provision of this Policy.
Down Date Endorsement
During construction, upon request of the insured lender, you may issue an endorsement dating down the Date of Policy. Title must be brought to date, and any intervening items of record must be included as exceptions on the endorsement.
Future Advance Endorsements
If the insured lender requests a future advance endorsement, you may issue the ALTA 14.1-06 Future Advance-Knowledge endorsement on a Loan Policy insuring a construction loan mortgage upon compliance with underwriting guidelines for the endorsement. The Future Advance endorsement may be issued without a mechanic's lien exception.
If you have any questions relating to this or other bulletins, please contact a Stewart Title Guaranty Company underwriter.
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