There are a variety of insurance policies necessary to protect both customer and lender from personal property loss, false title claims, income loss and property damage. This section will discuss the types of insurance involved with your transaction.
This is an insurance policy that covers damage to your home caused by fire, wind, theft, and other disastrous events. It combines insurance on the home, its contents, loss of use (additional living expenses) and sometimes specific personal property of the homeowner. Liability coverage for accidents that may cause injury may also be included. The cost of homeowner’s insurance will vary based on the policy re-quested and your individual credit. The policy is based on what it would cost to replace the home and its contents. If required coverage items, such as 100% replacement cost or specific perils (fire, hail damage, and other weather-related incidents) are not included in the original policy, you may be required to add a rider to cover those perils before loan approval can be given.
Condominium owners will find that their HOA has a master or blanket policy that covers the buildings and common areas in the entire development. Coverage must equal 100% replacement cost of the building in which the subject property is located. If a condominium’s master policy does not provide sufficient coverage for perils, property damage and bodily injury a supplemental policy obtained by the customer will be acceptable. A “walls-in” policy (known as H0-6 policy) is required for all attached condominium projects, unless the master policy provides the same interior unit cover-age. A “walls-in” policy covers permanent fixtures such as cabinetry, countertops and light figures. Call your insurance provider to discuss the best coverage to suit your needs.
This coverage is only required if the property is located in a flood zone as determined by the FEMA (Federal Emergency Management Agency) maps. The government draws a Flood Hazard Boundary map that divides the country into flood zone risk areas, and their Flood Insurance Rate map sets the coverage and premiums for those areas. Flood insurance for contents is available to cover losses suffered by the property owner in the event of a flood or other water damages.
This is an insurance policy payable to a lender in cases where the mortgagor (customer) is not able to repay the loan and the lender is not able to recover all its costs after foreclosure. The insurance premiums you pay may be tax deductible. Contact your tax advisor for more details.
Private Mortgage Insurance (PMI) is provided by non-government issuers. This insurance is usually only necessary if the down payment is less than 20% of the sales price or appraised value (the loan-to-value is 80% or less). Once the principal reaches 80% it is no longer required. Federal regulations require the lender to drop the monthly PMI once the principal balance reaches 78% of the original transaction value. The amount of the PMI premium is dependent on many factors such as loan-to-value ratios, type of loan, credit scores, occupancy, and term of loan. Generally, the higher the risk, the higher cost for the insurance premium.
FHA loans are government insured loans and will always require mortgage insurance. There are two premiums to collect—an upfront premium that will be financed in the loan amount, and a monthly premium that is included in your monthly payment. Mortgage insurance premiums must be paid for a minimum of five years, regardless of your loan-to-value ratio.
VA loans are government insured loans to veterans, reservists and active duty military. The insurance premium (referred to as the VA Funding Fee) is only charged up-front, and is financed into the loan amount, or can be paid in cash. There are no additional monthly payments.
Title insurance is protection for lenders and homeowners against financial loss resulting from legal defects in, or other claims against the property’s title. The cost of the policy is usually a function of the value of the property and is often borne by the purchaser and/or seller. Per the purchase con-tract Item #6, the seller agrees to pay for a standard-coverage owner’s policy of title insurance, insuring the buyer in the amount of the purchase price. Per Item #7, Seller Disclosures, the seller is required to provide to the buyer a commitment for the policy of title insurance. Lenders require the borrower to provide a title insurance policy to cover the lender’s legal interest in the property. There may be endorsements to the lenders title policy for various issues required by the lender. The title insurance costs are generally paid at closing as part of the normal closing costs.
There are home warranty programs for new construction and for existing homes. It is a service contract that covers major housing systems—for example, plumbing and electrical wiring—for the first 12 months you own your home. Many warranty plans may be renewable after the initial 12 months. The warranty guarantees repairs to the covered system and is renewable. These programs generally cover items that a homeowner’s insurance policy would not.