Closing Protection Letters-What are they and when should you get one
A closing protection letter is issued in an Escrow and there could be several issues. What are they?
First a closing protection letter is issued when money is deposited to the Title Company. This is used to protect the money that is held by the title company to “protect” the money that they hold. It is used to safeguard the funds from fraud and embezzlement. It is also used to protect the money if the title company would close their doors. Typically not in this market but in the late 2000s we saw this.
Who gets a closing protection letter? The three main parties are the Buyer, the Seller and the lender if there is one involved on the Buyer’s side.
The Title companies all have a credit line and this line could be underwritten by a larger company. So the Closing Protection letter may come from a different company but will have the Escrow number on it. This letter for the amount of the money held will go against the credit line. This is standard practice.
If you are in the Seller’s position and earnest money is deposited, you definitely want a “CPL” to insure that your interest in the earnest money is protected. If for some reason the Buyer defaults and you have the right to the earnest money, you want to be sure that it is there when you obtain it.
If you are in the Buyer’s position and you have earnest money on deposit, you definately want a “CPL”. This protects your earnest money as the followed in the definition of the terms of the contract. When you deposit your closing funds whether it is additional funds or the whole amount, you should request an updated CPL.
If you are a Buyer and are obtaining a loan, the lender is NEVER going to send over the closing funds until they have a CPL as well.
So as you can see there may be three to four (or more) CPL in an Escrow. These are highly recommended for both the Buyer and Seller. As I have stated, your lender will require it.
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