“In the fourth quarter, 75% of Americans say their local housing market is starting to cool, according to VaIuelnsured’s Q4 2018 Modern Homebuyer Survey. Homeowners in California, Colorado, Texas, & Washington are most likely to say their local market is starting to cool off” Realtor Magazine
If a word cloud were to arise out of the average house closing, the biggest words (after “sign here and initial there”) would probably be MORTGAGE, followed maybe by APR. But ranking right up there in big capital letters as well, would be INSURANCE.
Insurance is a major part, and not an insignificant expense, of the home purchase experience. Hazard or home- owners’ insurance may be the first type that comes to mind, but there are other insurance products that homebuyers may be required to purchase—FHA or private mortgage insurance, title insurance, and sometimes flood insurance; and others that may be presented to homebuyers as an option; owner title insurance, credit insurance, home warranties, and insurance against specified hazards like earthquakes.
Homebuyers can be overwhelmed by the decisions and details that come at them as a home purchase nears completion so it can be easy to overlook insurance that is really needed or take necessarily expensive. This issue we explain why some insurance policies are required when you buy a house and some ins and outs of others that are not.
The most important thing to understand is that the required types and or levels of insurance have little to do with protecting homeowners or their homes; they are designed to protect the lenders’ investments. There is nothing wrong with that— business is business—but homebuyers do need to be clear on that concept.
ClosingCorp conducted a survey among consumers who had purchased a home in the first full year after the new Truth-in-Lending rules and forms came online. The survey found that 35% of respondents were surprised by some of the costs they had to pay at closing even though the new rules require all costs to be disclosed shortly after the loan application is submitted and again no less than three days prior to closing the loan. The cost that surprised homebuyers most frequently was for private mortgage insurance or PMI.
PMI—for loans purchased or guaranteed by the GSEs Fannie Mae and Freddie Mac—and FHA insurance are not required for all loans, only for those with down payments of less than 20% of the mortgage amount. This insurance protects the lender in the event the homeowner defaults on the loan. Premiums for both PMI and FHA insurance are paid upfront (at the closing) and thereafter as an annual fee which is added on to the monthly mortgage payment.
PMI isn’t a life-of-loan commitment. It can be removed once the homeowner has sufficient equity in the home, either because the home’s value has increased or by paying down the mortgage, although there is a bit of a process, and sometimes an appraisal involved. FHA insurance however can only be removed by selling the house or refinancing out of the loan.
Another type of insurance that came as a big surprise to those polled by ClosingCorp was title insurance. Borrowers are often even more confused because there are two types of policies, lender and homebuyer. The first, as the title implies, protects the lender and so is required and issued in the amount of the mortgage. The second protects the owner’s interest and typically covers the entire home purchase price. An owner policy is optional, but most experts recommend buying it.
Title insurance is also confusing and so are the reasons for needing it. A title search is conducted prior to the closing (there will be a charge for doing this on the loan disclosure), but property records can extend back centuries and it is possible to miss a defect in the title. For example, generations ago someone may have been granted an easement on the land. That easement may be benign—maybe it allowed the town to run a water main across one corner of the lot—or it could be a big potential problem. A neighbor might hold an easement granting him the forever right to drive across the lawn, or a utility company can, if they wish, build a transmission tower on what is now the patio. Perhaps an addition to the house violates zoning regulations, or a deceased owner’s long-lost heir turns up with a claim to your home. More common are old mortgages or mechanics liens that were never properly discharged. These problems are usually fixable, but at a price. Title insurance covers that cost.
Homebuyers aren’t usually surprised to be told they must insure the lender’s collateral, i.e. their new house, against loss. The trick with this kind of insurance is to make sure there isn’t a surprise waiting, and usually an unpleasant one, if one ever needs to file a claim.
Hazard insurance and homeowners’ insurance are terms that are sometimes used interchangeably, but they are not the same thing. Hazard insurance protects the building against damage or destruction. Period! It does not insure the owner’s personal property nor does it protect against liability claims. Home- owners insurance does it all, combining hazard coverage, insuring the home’s contents, protecting against liability. Most homeowner policies also cover living expenses if damage makes the house uninhabitable.
You probably really want your new entertainment center covered if it is stolen, but do you need liability insurance? Most probably yes. It protects you against lawsuits for bodily injury or property damage that you, your family members, even your pets, cause to other people. Not just at home but anywhere in the world.
Suppose your next-door neighbor trips and falls on your front steps, or your pet ferret bites the Avon lady. Of course, they are probably going to sue. The liability portion of your policy pays for both the cost of defending you in court and any court awards arising out of a resulting lawsuit up to your policy limits.
GOING FOR THE GREEN
The National Association of Home Builders (NAHB) found builders use an average of 10.2 different green products/practices in their new homes and nearly a quarter seek green certifications like Energy Star or LEED. Those builders who have their homes green certified are more likely to use more green products and practices, but not by the margins one might think. While those that tend toward certification use an average of 11.9, the 48% who say they never or almost never have their homes certified average 9.1. NAHB said this suggests many more builders could qualify for certification with relatively small tweaks to their current practices. NAHB Eye on Housing
Knowing the Limits
Your loan officer will tell you what type of policy your lender requires. Some will accept hazard insurance (they don’t care about your entertainment center) but, because an unfavorable outcome in court could cost you your home, many lenders will require a homeowner’s policy for the liability coverage.
Homeowner insurance comes in several flavors—the most common are HO-1 through HO-8 policies. Some cover different types of buildings (condos and mobile homes are covered differently than one-to-four family dwellings) and others cover more or different perils. This is where you need to pay attention.
Some policies—HO-1 and HO-2 for example—cover only “named perils.” As you might expect these include fire, hail, lightning, theft, vandalism. As you might not expect, one of the 16 covered perils of an HO-2 policy is a volcanic eruption. Other policies, including the most popular type, HO-3, cover all perils except those that are specifically excluded. The most common perils to be excluded are earthquake damage, flooding, and lack of maintenance.
If the house is in an area prone to an excluded peril it is smart to check with an insurance agent about purchasing specific coverage. Flood insurance, in fact, is required by most lenders if a home is in a Special Flood Hazard Area.
A lender will require that you purchase insurance against the damage or destruction of the house at a dollar amount of at least the balance of the mortgage. It is up to the borrower to determine if he or she needs to carry a larger policy—one that covers some or all the equity in the home or is enough to rebuild a comparable home at current prices.
A homeowner policy covers contents in an amount proportional to the size of the policy, generally between 50 and 70%. If you have especially expensive furniture, electronic equipment, or other belongings, you may need to upgrade to a more extensive policy. There is frequently a cap on the amount you can claim for lost art, jewelry, or collectibles. These can be fully insured, if you wish, under a rider to the homeowner’s policy.
There are two other types of insurance—although in one case that word is a stretch—that may or may not come up during the home purchase. You will, however find your mailbox inundated with offers for them shortly thereafter.
Credit insurance is sometimes offered by lenders, although that isn’t as common as it used to be. There are several types which variously cover monthly payments or pay off the loan entirely in the event the borrower dies, is temporarily or permanently disabled, or involuntarily laid off from employment. It is always optional.
While not technically insurance, home warranties cover repair or replacement of home systems and appliances. We mention them here only because they are sometimes provided by the seller as a sales incentive.
Picking and Choosing
There may not be much choice involved when it comes to some of the insurance required when buying a home. FHA and PMI are what they are and they cost what they cost. There are some or even a lot of decisions and choices with other policies.
Cost, of course, is always a primary concern. Shop around. Get several quotes, in writing, for policies you must or want to have, but make sure you are comparing apples to apples. Quotes should be detailed and specific as to coverage amounts and included and excluded perils.
The price of title insurance is regulated in many states, including California. In unregulated states, prices can vary by as much as 10 to 20%. Even where regulated, there is some wiggle room. A typical owner policy will protect against contingencies like fraud, forgery, undisclosed heirs, and spousal claims. You might save money by forgoing addition coverage as, for example, against violations of zoning or subdivision covenants.
Saving on hazard or homeowner’s insurance similarly involves trade-offs and weighing risks. How much coverage should you carry? Do you want cash value insurance on your contents (price of the item less depreciation for wear and tear) or replacement coverage that covers the cost of new items? Is it worth the gamble to take a higher deductible? Are you worried enough about earthquakes or floods to take out separate coverage even if it isn’t required?
ROLL THE PRESSES
A house made of 3D-printed parts is no longer a surprise, but a tiny home near Moscow, Russia “takes the instant gratification of a 3D-printed structure one step further.” All of the printing was done on site. The 400- square-foot home was made with Apis Cor’s 3D printer, a crane-like apparatus small enough to be portable. The structure’s main components, self-bearing walls, partitions and building envelope, were all printed on site, eliminating transportation and assembly.
The sleek, roughly circular home, cost just over $10,000 to create. The exterior was finished in a white decorative plaster, while the interior has a contemporary style, furnished with appliances from project partner Samsung. Jenny Xie, Curbed
Be sure to check on any available discounts. Some insurance companies offer them for hard wired smoke detectors, home security systems, sprinklers, or deadlocks on doors. There may be senior discounts available or even insurance through groups such as veterans’ organizations or your credit union.
Insurance is not anyone’s favorite purchase. It isn’t fun, doesn’t taste good, or look pretty on the wall. Still there is a lot of truth in the old statement— better to have it and not need it than to need it and not have it. Or have the correct it, or enough of it. Talk to your lender, talk to your insurance agent; be prepared to make informed choices.
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