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How Homeowner's Insurance Affects Your Loan Approval

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Let me outline a situation that happens all too often in the loan process;  the customer has been pre-approved, the titlework is done, the appraisal has come in above the purchase price, everyone is just waiting on final approval and closing instructions.   Then, out of the blue there are problems.   The insurance is higher than the loan officer initially estimated in the loan application.   So what?   Here is why this can be a potentially huge problem;

  1. The loan officer can only make a somewhat educated guess as to how much the insurance premium will be
  2. The debt to income ratio is affected by the insurance premium and if the premium comes in higher, the underwriting decision is invalidated and has to be re-run.
  3. For loans underwritten to conform to Fannie Mae/Freddie Mac guidelines, debt ratio can be a huge issue; sometimes causing an otherwise clean deal to be either turned down or put in a different pricing tier---higher rates.

While it is true that the insurance premium is derived in a large part from the property itself, an equally important factor in deriving premium is the individual borrower's insurance score.    In other words, I'll pay a different rate than you will to insure the same exact property for the same exact amount of coverage.   Why?   My consumer history is different from yours.  My credit history is different from yours and my claims history is different from yours. 

What's the point?

The point is, until the loan officer or realtor or the customer gives an insurance agent the exact customer specific and property specific information, the premium the loan officer used to get the pre-approval is a guess.  Which means the debt ratio is a guess, which means the pre-approval could be meaningless.   

As a loan officer, I could take a customer's information, input it, pull credit and generate an automated Fannie Mae/Freddie Mac underwriting decision in minutes.    This almost always has to happen first, because realtors and sellers usually will not take an offer seriously until they know a customer has been pre-approved for the loan.   The pre-approval process is done by the loan officer, not by an insurance agent, so there is simply no way for the LO to know the true premium.   Most LO's will overestimate the premium to protect against premium swings.    A truly experienced LO will ask permission to get an insurance quote as well, or instruct the borrower to obtain one BEFORE issuing a mortgage pre-approval letter and BEFORE the deal goes to contract.  



Sean Allen
International Financing Solutions - Fort Myers, FL
International Financing Solutions

Hey Seth,

That is an interesting post. Fortunately, I have never had such an experience, but I'm sure it will happen sometime. I'm curious though, I know that when I request a quote on insuring a clients future home, the Insurance Agent never asks me for personal information on the buyer in order to get their credit rating. All I do is e-mail the agent a copy of the appraisal and then they quote it. I wonder if insurance premiums are calculated differently in Florida..... heck insurance down here is usually $1800 to $2400 for a $250,000.00 home.

Anyway, great article.

Sean Allen
The Mortgage Professionals
Professional Credit Consulting & Repair

Aug 27, 2007 08:59 AM
Seth Callen
Farmers Insurance - Lawton, OK

Sean, thanks for commenting.   There are a few companies out there who's rates aren't driven by individual consumer scoring, but not very many.  Farmers, State Farm and I think Allstate all derive premium rates partly from an internal scoring system which is based partially on credit history and partially on claims/loss history.    Now, when you email the appraisal to the insurance agent--like I used to when I brokered---the evidence you get can sometimes be as hypothetical as a sloppy mortgage pre-approval letter.    In some cases, the EOI will be sufficient to close the loan, but the premium will change later when the agent gets the full picture.   Bottom line, the agent shouldn't give out EOIs if they use an individual scoring system without having the customer's info.     Since you've been doing mortgages, you know that a slight change in DIR can bump you from an Accept to an EAI, and you know what kinds of hell that can cause.   Mortgage premiums going from 800/year to 1600/year when correctly underwritten can throw your DTI out of line on your 1003.     I'm just able to see it from both perspectives, now that I do insurance as well as loans.  

Aug 27, 2007 09:33 AM
Mike Jones
SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) - Tucson, AZ
Mike Jones NMLS 223495

Seth, thanks for useful content!  I'll be back for more.

Mike in Tucson

Aug 30, 2007 03:53 PM
Seth Callen
Farmers Insurance - Lawton, OK
Thanks for commenting.  I've heard that USAA is pulling out of Florida entirely.  Have you heard this?
Aug 31, 2007 03:00 AM
Frank Laisch
Orlando, FL
"The Insurance Guy"
yes, USAA has stopped writing new policies in Florida, they are only writing policies for Military Personnel with Orders to Florida.
Sep 01, 2007 01:17 PM
Rick Grand
nowhere - Eugene, OR
yes, that darn insurance can be a stickler! We do have to estimate it but i do know my area very well and can get pretty close to what it will be every month. Plus I try to stick with using the same person and encouraging my clients to use him because he always seems to come in lower than everyone else. In one case my client's insurance provider quoted him 1200/year for his home and the agent I work with quoted him $400 a year! HUUUUUGE difference. But it is crucial to at least get a good ballpark so that if you are off by a few dollars you are still okay.
Sep 27, 2007 03:47 AM
James Jones
Home Equity Banc - Bixby, OK

Hi Seth,
Your observations are right on.  I'm looking at this from the insurance agent side and can only be most helpful and accurate with all the infiormation when generating the insurance quote and binder.  It usually takes me 2 - 3 days to get a roof inspection back and enough information from the client to provide a firm quote.  Finding an independant agent that can "shop" rates and may have a company or two that does not count credit can be helpful if you have clients with credit scores under 700.  For credit scores over 700 you will want to get quotes from companies that discount based on that.  I don't like the credit scoring system for insurance but as an agent I can find the right company for the right customer.  It adds credibility to the realtor and lender if i do the right job the first time.  


Sep 29, 2007 07:30 AM
Michael Truiano
BHG Rand Realty - Nanuet, NY
I've had situations like this.  Loan officers have called me asking to cut the insurance coverage in half to lower the clients premium and i guess, debt ratio's.  This wont fly with most insurance companies if they are offering replacement policies.  Its a good idea to have the insurance agent run the insurance score upfront so that you have an accurate quote.  Most home-buyers are hesitant to agree to running these consumer reports, beacuse they think it is considered a credit inquiry.  But i have yet to see an insurance score inquiry show up on a credit report.
Oct 03, 2007 07:55 AM