Avoiding a Homeowners Insurance Disaster When You Apply for a Mortgage

By
Mortgage and Lending with NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 IL Lic 031.0006220/WI
http://actvra.in/52gd

 

Avoiding a Homeowners Insurance Disaster

When You Apply for a Mortgage

 


 Mortgage Documentation Checklist
When buying and financing a home, prospective Borrowers are required to produce a variety of documentation  and information to their Lender at the time of application and prior to the Closing of their loan.  In almost all cases, Homeowners Insurance is included within that documentation requirement.  

What service does Homeowners Insurance provide? Why is that service so important?

Homeowners Insurance policies offer multiple types of protection and coverage to an insured borrower/home owner.  Those include:

  • Coverage on the STRUCTURE of the home
  • For PERSONAL BELONGINGS
  • LIABILITY protection
  • LIVING EXPENSES, should the homeowner be displaced from their home because of disaster 


How is Homeowners Insurance paid for?

You've probably heard or seen the acronym, "PITI" when reading and learning about mortgages and monthly payments.  This is especially true if you're a first-time home buyer.  "PITI" equals all portions of a monthly mortgage payment. 

PITI stands for:  

  • Principal
  • Interest
  • Taxes
  • Insurance  


Homeowners Insurance makes up the 2nd "I" within that acronym. 

Once the first year of insurance premium has been paid for prior to (or at) the Closing of a loan, monies must be set aside to pay for future insurance premiums when they come due.   Homeowners Insurance (and real estate taxes) are typically paid for via an escrow account

The escrow is established at the time of the Borrower's Mortgage Closing.  Escrow Accounts must be established if a Loan-to-Value is greater than 80%   (meaning a Borrower made a Down Payment on their home purchase of less than 20%).  
 
Those that make a Down Payment of 20% or more can choose to pay Taxes and Homeowners Insurance on their own without the establishment of an Escrow Account.  If this method of payment is chosen, proof of Real Estate Taxes and Homeowners Insurance payments must be provided to the Mortgage Lender. 

But once again, escrow payments for Homeowners Insurance only take place once the first year's insurance premium is paid prior to/at  Closing ... and an escrow account is established to pay for future premiums.

How much coverage does a Mortgage Lender require on a Homeowner Policy?
 
Most Lenders require that the insurance coverage for a Borrower's Homeowners Policy be in an amount that covers the rebuilding of the home should a disaster occur.  Or at minimum, the mortgage amount on the property.  (The insurance premium, and thus the insurance portion of a Borrower's PITI, is determined by the amount of coverage held on the Borrower's property.)
 
For some Borrowers:  Additional insurance coverage may be required by a Lender, if the home mortgaged lies within a designated disaster zone, such as flood, earthquake, or hurricane.  In the Chicagoland - Illinois area:  Flood Insurance is the most commonly added and required disaster zone coverage I see as a Mortgage Originator.
 
So  The Importance of Insurance Coveragewhy do Mortgage Lenders have this Homeowners Insurance requirement?
 
It's common sense really ...
 
The Mortgage Lender's collateral for the loan made is the physical structural home itself.
 
Should a disaster occur:  No home = little or no value attached to the remaining property.  Mortgage Lenders need this protection in place for their collateral investment.  That is why most Mortgage Lenders require you provide them a paid receipt proving payment for the full 1st-year annual premium on your Homeowners Policy.
 
They also require that you provide a Homeowners Policy (Doc Page or proof thereof) showing them as "loss payee or Mortgage Payee" (along with yourself) on your Homeowners Insurance Policy.  This must be provided prior to Closing.
 
Why does a Lender want this tangible proof beforehand?  Via your Homeowners Policy, the collateral property the Mortgage Lender holds (your home) is completely insured and covered from the moment you close on your loan.
 
That's where the "loss payee/mortgage payee" clause comes in ...
 
Because of that clause, if damage or disaster occurs to your property, any check from your insurance provider (typically made out to you and your Lender) will ...
 
  • First:  Pay off the outstanding mortgage debt 
  • Second:  Or pay for needed repairs to restore the property
  • Third:  Go to the Borrower/Owner


It's clear that Homeowners Insurance ... and proof of its annual premium payment ... is vitally important.  So much so, that a Mortgage Lender may not schedule your Closing without it.  

Mortgage Underwriters may hold up a "Clear to Close" until it's received.  It's certain that a Lender will not fund at the time of your Closing if this requirement is not successfully completed.  

(Paying for Homeowners Insurance at the time of Closing, or before, is typical - but rarely, special allowances get made for cases to be paid afterward.  Please ask me for further details regarding this.)

Be aware:  Mortgage Lenders require that you carry Homeowners Insurance throughout your entire mortgage term.  No lapses in coverage are allowed.  

Should you not provide your Lender with a policy or should one lapse, they are allowed to buy insurance for you ... and charge you accordingly.  They do, however, have to provide you advance notice of doing so. 

I've found that Homeowners Insurance is one portion of the mortgage process that seems to stump or trip-up many of my clients.  For that reason, I strongly suggest you act proactively and seek your Homeowners Policy as soon as requested.  

Where do you start?

Contact your insurance agent.  Should you or your agent require additional information regarding the requirements of your Homeowners Insurance Policy, contact me immediately.  You don't want to run the risk of holding up your Mortgage Closing for something as simply arranged for as your Homeowners Insurance. 

If you do not have a preferred agent:  Please let me know.  I'll be happy to refer you to an experienced, qualified Chicagoland insurance agent that can assist you with your insurance needs. 

I hope this information proves useful to you as you head into your home buying and mortgage financing process.  I look forward to talking with you soon and working together towards a successful Closing of your loan ...

 

 Let's Talk Today!

 

 

*  Hoping to Buy or Refinance a home in New Lenox, Will County, or elsewhere in the Chicagoland area?  Contact me today!  I'll put my 40+ years of mortgage experience and expertise hard to work on your behalf.

I'm easily found at:

 

Gene Mundt

Mortgage Originator  -  NMLS #216987  -  IL Lic. #031.0006220  -  WI #216987

American Portfolio Mortgage Corp.

NMLS #175656
 
Direct: 815.524.2280
Cell or Text: 708.921.6331
eFax: 815.524.2281
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Gene Mundt

 Mortgage Originator  -  NMLS #216987    

                                 IL Lic. #031.0006220  -  WI License #216987                                                                                                    

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Re-Blogged 2 times:

Re-Blogged By Re-Blogged At
  1. Nick & Trudy Vandekar, 610-203-4543 03/15/2017 10:01 AM
  2. Debbie Reynolds 03/15/2017 01:58 PM
Topic:
Lending / Financial
Location:
Illinois Will County New Lenox
Groups:
Mortgages
1st Time Buyers
Consumer Mortgage Tips
Advice for Buyers
Bananatude
Tags:
homeowners insurance
escrow accounts
piti
homeowners insurance requirements for mortgages
mortgage documentation requirements

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Rainmaker
384,607
JoAnn Moore
The Mortgage Market of Delaware - Georgetown, DE
Home Loans in Delaware

Good, thorough information, Gene. It is difficult sometimes to get the homebuyer/homeowner to realize how important it is for them to get this done in a timely manner.   

Mar 14, 2017 05:31 PM #5
Rainmaker
396,767
Francine Viola
Coldwell Banker Evergreen Olympic Realty, Olympia WA - Olympia, WA
Realtor, In Tune with your Real Estate Needs

Very well laid-out and explained!  

Mar 14, 2017 08:37 PM #6
Rainmaker
841,014
Jan Green
Value Added Service, 602-620-2699 - Scottsdale, AZ
HomeSmart Elite Group, REALTOR®, EcoBroker, GREEN

Excellent post Gene!  For anyone that doesn't understand homeowners insurance or needs a refresher, this is a perfect post about avoiding a homeowners insurance disaster when you apply for a mortgage! 

Mar 14, 2017 08:49 PM #7
Rainmaker
2,474,943
Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Certified Feng Shui Expert, Speaker & Researcher

Avoiding the fallout of a disaster is the thing you do for a consistent amount of time in this industry or really any business.

Mar 14, 2017 11:05 PM #8
Rainer
253,675
Mick Michaud
Distinctly Texas Lifestyle Properties, LLC Office:682/498-3107 - Granbury, TX
Your Texas Lifestyle is Here!

Great detailed analysis for prospective borrowers.  Glad to see you're being proactive in educating clients.

Mar 15, 2017 05:05 AM #9
Rainmaker
1,417,848
Gary L. Waters, Broker Owner, Waters Realty of Brevard, LLC
Waters Realty of Brevard, LLC - Rockledge, FL
... a small office, delivering big service!

I think many first time buyers fail to understand the pay in advance and escrow process. It is good when the lender as well as the agent reiterate the importance of the insurance and when to purchase it.

Mar 15, 2017 07:09 AM #10
Rainmaker
1,370,919
Grant Schneider
Performance Development Strategies - Armonk, NY
Your Coach Helping You Create Successful Outcomes

Good Morning Gene - as always you provide complete information for lenders to understand. I really like not worrying about insurance and taxes and having it in monthly payments. 

Mar 15, 2017 07:44 AM #11
Rainmaker
35,713
Christina Steinhaus
Coldwell Banker Residential Property - West Palm Beach, FL
Real Estate Agent serving the Palm Beaches

Great explanation of Homeowners' Insurance;  timely too! I am in the process of helping a young client with the purchase of a home. And this information will certainly help the process.   Too often, we assume everyone knows this.  Too often, the buyer is embarassed to ask.  Thank you for the informative post.

Mar 15, 2017 08:11 AM #12
Rainmaker
935,800
Margaret Goss
Baird & Warner Real Estate - Winnetka, IL
Chicago's North Shore & Winnetka Real Estate

I will definitely bookmark and keep this post - you've provided such thorough information on the subject of homeowner's insurance.

I've often heard people say that if they pay cash, they don't need homeowner's insurance.  Penny wise and pound foolish if you ask me!

Mar 15, 2017 08:29 AM #13
Rainmaker
2,193,028
Richie Alan Naggar
people first...then business Ran Right Realty - Riverside, CA
agent & author

The lay person can digest this....Well done Gene

Mar 15, 2017 09:07 AM #14
Rainer
100,441
David A. Weaver
Peoples Bank & Trust - Scottsdale, AZ
23 years helping folks finance their homes.

For purchases home owners hazard coverage is of course required, but let's not forget our homeowners who are reviewing their refinance options.  That is a great time, when they have all of their financial data at their fingertips to make a few extra phone calls to maybe save substantially on their HOI premium.

Mar 15, 2017 09:21 AM #15
Rainmaker
567,492
Nick & Trudy Vandekar, 610-203-4543
Long & Foster Real Estate Inc 610-225-7400 - Devon, PA
Tredyffrin Easttown Realtors, Philly Main Line

Great post, thank you will be re-blogging this as it is excellent information.

Mar 15, 2017 09:56 AM #16
Rainmaker
88,405
Mary Weiss
Zillow Group Mortgages - Seattle, WA
Trainer & Content Manager

Thank you for providing all this great information in an-easy-to-understand format. Insurance is one of the biggest painpoints for a lot of first-time homebuyers, so I'm sure a lot of people will find this helpful - and help them be more financially prepared when getting to closing - plus make the process that much smoother. 

Mar 15, 2017 01:18 PM #17
Ambassador
3,373,093
Debbie Reynolds
Platinum Properties - Clarksville, TN
Your Dedicated Clarksville TN Real Estate Agent

This is an excellent article on homeowner's insurance, what it covers and how it is paid. Thanks for taking the time to write it, Gene.

Mar 15, 2017 01:56 PM #18
Rainmaker
3,224,525
Lou Ludwig
Ludwig & Associates - Boca Raton, FL
Designations Earned CRB, CRS, CIPS, GRI, SRES, TRC

Gene

Your post does a great job on explaining homeowners insurance.

Good luck and success.

Lou Ludwig

Mar 16, 2017 05:55 PM #19
Rainmaker
3,224,525
Lou Ludwig
Ludwig & Associates - Boca Raton, FL
Designations Earned CRB, CRS, CIPS, GRI, SRES, TRC

Gene 

Congratulations on the gold star feature for an outstanding post.

Good luck and success.

Lou Ludwig

Mar 16, 2017 05:56 PM #20
Rainer
377,837
Dörte Engel
RE/MAX Leading Edge - Bowie, MD
ABC - Annapolis, Bowie, Crofton & rest of Maryland

Dear Gene,

Hopefully, I waste all of my insurance payments from now on & never have a claim again. A friend had a fire recently. Well-insured, but what a nightmare!

Mar 16, 2017 07:41 PM #21
Rainmaker
883,902
Corinne Guest, Managing Broker
Barrington Realty Company - Barrington, IL
The Choice of Professionals

In our world, IL, buyers should know by the words and explanation of their Realtor as a contract is written and signed, they've got to go get this started asap. I've got a few good attorneys that remind their clients to do the same, check the home can be insured, but many do not do that, and get your policy ready to be paid for when closing is scheduled. But I have always wondered why, when insurance companies will accept monthly or quarterley payments, which are $$ loaded at the front, is it necessary?

Mar 17, 2017 08:55 AM #22
Rainmaker
1,582,519
Patricia Feager
DFW FINE PROPERTIES - Southlake, TX
Selling Homes Changing Lives

Thanks, Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi for this comprehensive blog post. It was very educational and informative! You are one of the most thorough people I know in this industry and you never cause me to scratch my head and wonder what you're talking about. You truly are an expert at what you do!

Mar 18, 2017 06:12 AM #23
Rainmaker
2,453,769
Scott Godzyk
Godzyk Real Estate Services - Manchester, NH
One of Manchester NH's Leading Agents

I love your blog as it is so thorough and can really help buyers when it comes to the mortgage process Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi 

Mar 18, 2017 02:33 PM #24
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Rainmaker
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Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi

708.921.6331 - 40+ yrs experience
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