Home Loan Insurance

Buying a home is a very costly experience for most people and the fact that you will need home loan insurance only adds to the coat of buying a home.

When you are planning your finances for your home purchase besides the down payment and closing costs you will really need to include for home loan insurance costs that are required to be in place before the lender will release the closing funds.

Home Loan Insurance-Required to Close a Mortgage

Before the bank will release your mortgage check to the closing attorney it will need to be satisfied that the following home loan insurance policies are in place:

Homeowner Insurance

Homeowner insurance is basically a fire insurance policy with clauses for owner liability in the event of an accident to personal belongings or personal injury. Most homeowner insurance policies will have a contents clause covering the contents and personal belongings of the policy holder and their family members.

Title Insurance

Title insurance is required by mortgage lenders to protect their interest in the event that an error by the title examiner causes them to loan on a property which is not free and clear. The lender title insurance policy only protects the lender however an additional owner title insurance is available to the borrower if they wish to purchase it. Title insurance for a lender covers the mortgage amount whereas title insurance for an owner covers the purchase price of the home.

Private Mortgage Insurance or PMI

PMI or private mortgage insurance is an insurance cover required by almost all mortgage lenders for loans of more than 80% loan to value. What this means is that if you are putting down less than 20% then your lender will require that you pay a monthly private mortgage insurance premium to protect them in the event of a default and subsequent foreclosure.

It may be possible to put down less than 20% and avoid paying PMI by using a strategy where you8 take out an 80% first mortgage and a small second mortgage to bridge the difference between your down payment and the 20%.

For example if you have a down payment of 10% on a $200,000 home you would need a second mortgage for the additional 10%

Home purchase price  = $200,000.00

Down Payment                = $ 20,000.00

First Mortgage 80%      = $160,000.00

Second Mortgage 10%  = $ 20,000.00

Total Purchase Monies = $200,000.00

Also if you are paying PMI and feel that your homes value has appreciated you can have it appraised and if your equity exceeds 20% you can ask the lender to drop their PMI requirement. Before you hire an appraiser make sure that they are acceptable to your lender.

Disaster Insurance

If you live in a area prone to flood or earthquake which are considered acts of God and not covered by most homeowner insurance policies your lender will require that you have a clause inserted into your homeowner insurance policy covering your home for any likely disaster scenario. These clauses can cost a lot of extra cash so before you commit your name to a purchase and sale agreement have your real estate agent check out the location of the home to see if it needs any extra insurance over and above normal homeowners insurance.

Home Loan Insurance Costs

Before you finally commit to purchasing a home do your homework and make sure that you are financially ready to put pen to paper and sign on the dotted line.

The cost of home loan insurance can be very high taking into account that you may be buying 4 policies.

Remember you will be paying upfront for:

• Homeowner Insurance
• Title Insurance for the bank
• Title Insurance for yourself

And you may be paying monthly for private mortgage insurance or PMI.

Condo Insurance

If you are buying a condominium you will require condo insurance to cover your unit contents, personal belonging and fittings and fixtures.

Condominiums are required to have a master insurance policy which covers the structure of the building against damage including fire. The condo master insurance policy would also cover the public areas of the building against loss due to personal injury.

Condo Insurance- Cover

While the general building and structure of the condominium is or should be covered by the master insurance policy it is important for the individual unit owner to ensure that their personal unit is fully covered by condo insurance against loss due to :

• Personal Injury
• Public Liability
• Burglary
• Interior Water Damage
• Interior Fire Damage

Master Condo Insurance Policy

The master condominium insurance policy will in most cases cover the following:

• The total exterior structure of the building including lawns and gardens, trees and shrubbery and eternal siding of the building. In most cases you will be responsible for your own windows.
• All Common areas including swimming pools, exerciser rooms, common roof decks, tennis courts and common rooms.
• Common building utilities including electrical, fire alarms, sprinkler systems, heating systems hot water systems, emergency lighting.

Master Insurance Policy

Before you purchase a condo it is imperative that you have a real estate attorney who thoroughly understands condominium law in your state thoroughly go through the condo docs including.

• Condo Docs
• Master insurance Policy
• All blueprints and Mylar’s
• The condo association accounts

Also check out the number of units that are owner occupied.

Condo Assessment

Just because there is a master insurance policy in place in your condominium doesn’t mean that you are covered. This is why it is so important to have your attorney check out the condo documentation. If there is a large deductible in the master insurance policy and a claim falls short chances are that the unit owners will be assessed a charge to meet the shortfall.

It will be wise for you when considering your condo insurance policy to get cover for any event that your attorney feels is not properly covered by the master insurance policy.

HO6-Condo Insurance Policy

In most States a condo insurance policy called HO6 is available. The HO6 condo insurance policy will provide insurance cover for the interior walls and for personal property held within the dwelling. A HO6 condo insurance policy will usually also provide liability coverage for the condo unit owner as follows:

This is a typical of the breakdown of an HO6 condo insurance policy

1. Coverage A – Dwelling: Declared Value.
2. Coverage B – Other Structures: Part of Coverage A.
3. Coverage C – Personal Property: $10,000 minimum.
4. Coverage D – Loss of Use: 50% of Coverage C.
5. Liability: Minimum of $100,000.
6. Medical Payments: Minimum of $1,000.

Title Insurance

A condition of almost every home loan is that the borrower takes out title insurance. The only purpose for title insurance is to cover the lender in the rare case where the law firm or title firm doing the title search for the home make an error.

What is Title Insurance

When you buy a home a law firm or Title Company will be hired by the lender to research the title of the home you are buying and they are lending on to ensure that the title is clear of liens and encumbrances other than those that will be paid off by the loan proceeds.If your home loan closes and the title agency made an error by saying overlooking an outstanding lien for $100K the fact that this lien predated the mortgage that you took out makes it the senior lien. 

This puts the bank who holds what it thought to be a first mortgage holder second in line or second mortgage holder. This is a scenario that most banks are not willing to find themselves in so they demand that as part of the financing package that you the borrower pay for a title insurance policy equal to the amount of the  mortgage to protect them in the event of an error by the title examiner. 

You might be forgiven for thinking that the bank or the title examiner should pay for this insurance but as with all things corporate it makes more sense for the consumer to pay up front and in full. 

How Much Does Title Insurance Cost

The cost of title insurance varies from State to State but usually costs in the region of .5% of the mortgage cost. In a $500,000 transaction the cost of title insurance to cover the lender would be in the region of $2000 to $3000.Also it should be remembered that this title insurance is totally for the lenders protection. It will not in any way benefit you the borrower who is paying for it. In most real estate transactions the borrower will be offered the opportunity to buy an additional title insurance policy to protect their interests. An owner’s policy of title insurance will usually be for the purchase price of the home whereas the lenders title insurance will be for the mortgage amount. 

It is interesting to note that the closing attorney who act as agents for the title insurance company will typically get 70% of the premium you pay for title insurance as a commission. 

Do I Need Title Insurance

The sad reality of buying a home for most people is that they need a home loan to facilitate the transaction. Because you need a home loan and the bank requires home loon insurance you basically have no choice but to pay for the banks title insurance policy. 

It should be a given that like any other industry the title examiner who is paid to perform a title search should be liable if they make a mistake but unfortunately this is not the case in the mortgage lending industry. 

The bank requires title insurance and you as a captive borrower are left to foot the bill.

Homeowner Insurance

A condition of almost all home loan mortgage commitments is a homeowner insurance binder. An insurance binder is a letter of intent from an insurance company to issue insurance on a property. Most home loans will not close unless a homeowner’s insurance policy together with a paid receipt for the first year’s premium is brought to the closing or faxed to the mortgage underwriter prior to the issuing of the loan check and closing package being sent to the closing attorney. 

Homeowner Insurance – Flood Zone

When you find a home that you are interest in making an offer on it is a good idea to check out the flood insurance rate maps for your area to see if your homeowner insurance policy will require flood insurance. Just because you feel that the home is sitting in a high and dry location doesn’t mean that it is not located in a flood zone on the flood zone map. If your mortgage lender requires a flood insurance policy as a condition of your loan commitment then you will be required to get flood insurance and pay for the first year’s policy up front. If funds are tight this could be an added expense you are not budgeting for and could be a deal breaker. 

Homeowner Insurance-Rates

There are no hard and fast rates for homeowner insurance. The best advice is to shop around and then shop some more. Get lots of quotes, ask friends and relatives who they use and how the find their service. 

Homeowner Insurance-Deductable

If your lender will allow it consider raising the deductible on the homeowner insurance policy. A deductable is the amount of any claim which you will pay before the insurance company steps in. Basically speaking if there is a claim for say $2000 and your deductable is $500 then the insurance will issue you a check for $1500 to facilitate repairs. If you consider raising your deductable to say $1000 then the insurance company will issue a check for $1000 on a $2000 claim. From the insurance companies perspective a high deductable reduces the instances of nuisance claims. 

Buy Home and Auto Insurance Policy from Same Insurer 

If you buy your homeowners insurance policy form the same insurance company who holds your auto insurance policy you will most likely get a discount. 

Insurance and Credit Report

Although it seems inconceivable the reality is that insurance companies will take your credit status into account when deciding on a homeowner insurance rate to offer you. From a corporate perspective bad credit is a sign of untrustworthiness and a bad character. So if you default on your financial commitments to your bank, lender, Cell Phone Company or utility company they believe you are more likely to make frivolous claims and to be generally irresponsible. In short if your credit score is low you are considered a bad risk by insurance companies.

PMI- Private Mortgage Insurance

PMI or private mortgage insurance is an insurance that a lender will require a homeowner to take out if the mortgage amount is for more than 80% loan to value of a home purchase mortgage. This basically states that if a homeowner is buying a home for $250,000 and the mortgage is for more than $200,000 then the borrower will be required to pay a monthly private mortgage insurance premium. This type of home loan insurance is put in place totally to protect the lender in the event of a mortgage default by the homeowner.

What is PMI

If a homeowner who has borrowed more than 80% to fund the purchase of a home goes into default and is foreclosed on the private mortgage insurance company will pay the lender an amount up to the 20% conventional down payment that the foreclosure sale fall short by.

How Much Does PMI Cost

Monthly PMI premiums can be substantial in our example above of a $250,000 home purchase if the homeowner only made a down payment of 10% then the home loan amount would be $225,000. In this scenario the monthly private mortgage insurance premium would be $116.25. This would be on top of the principle and interest payment of $1496.93 assuming a home loan at 7% interest rate over 30 years.

When estimating the monthly service of a home loan it is also necessary to factor in real estate taxes and homeowners insurance which may or may not be escrowed.

How to Avoid PMI

There are some ways to get around PMI the best being to take out a second mortgage for the difference between your down payment and 80% of the home purchase price. Inn our example of a $250,000 home purchase where the homeowner can only afford a 10% or $25,000 down payment then the home buyer would take out a second mortgage for 10% or $25,000. This would negate the need for PMI and save the homeowner $116.25 every month.

In a scenario where property prices have escalated and the homeowner can prove that their equity position in the home is for more than 20% of the outstanding balance of the first mortgage, then the homeowner can have the lender agree to cancel the PMI policy.

Home Loan Insurance

Home loan insurance is a necessary part of becoming a homeowner whether it is hazard insurance or PMI (private mortgage insurance). From the perspective of the homeowner it is necessary to perform proper due diligence to ensure that you do not end up paying for unnecessary home loan insurance.