What protects a lender and buyer against misapplication of funds during closing?

The Closing Protection Letter is an essential document that offers protection to both lenders and buyers against the potential misapplication of funds during the closing process. When a transaction is finalized, there is a risk that the funds deposited for closing could be mishandled or misappropriated by parties involved, such as title agents or closing agents. The Closing Protection Letter provides a safeguard by guaranteeing that if the closing agent fails to follow the instructions related to the distribution of funds, the title insurance company will cover the losses incurred.

This letter is crucial because it gives peace of mind to both parties, assuring them that if a closing agent does not adhere to the agreed-upon procedures, the title insurance company will compensate for any financial damage resulting from that misapplication. This form of security helps in facilitating smoother and safer real estate transactions, giving confidence to lenders that their investments are protected.

In contrast, a Warranty Deed and a Quit Claim Deed are primarily used to transfer property ownership, but they do not provide assurances regarding the handling of funds during a closing. An Affidavit of Title serves to affirm that the seller has legal ownership of the property and can transfer that title but does not address the issue of fund misapplication in the closing process. Thus,