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.

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.