Hawaii Pre-Licensing National Practice Exam

What factors might a lender consider when issuing a title policy?

1. Potential construction improvements

2. Existing undiscovered title defects

3. Personal guarantees from the buyer

4. The seller's credit score

The correct answer is: Existing undiscovered title defects

When a lender issues a title policy, one of the primary concerns is ensuring that the title to the property is clear and free of defects. Existing undiscovered title defects can pose a significant risk to the lender, as these defects may impact the lender's ability to enforce its lien on the property. A title policy is designed to protect against such risks, covering the lender in case any undiscovered issues arise after the policy is issued. In the context of lending, not knowing about undiscovered title defects can lead to financial loss if a claim arises later—these defects could include issues such as liens, easements, or disputes over property boundaries that were not revealed during the title search process. Therefore, assessing the potential for these defects is a critical consideration for a lender when deciding to issue a title policy. The other options do not directly relate to the title policy's purpose. For instance, while potential construction improvements might enhance property value, they do not directly affect the title's validity. Personal guarantees from the buyer could provide additional assurance for the lender, yet they don't impact the assessment of title risks. Finally, the seller's credit score is irrelevant to the title policy itself, as the policy focuses on the title's status rather than the creditworthiness of