The following is the information I share with my clients in Chicagoland - IL/WI to assist them with their mortgage and insurance decisions.
There are 4 types of insurance that are most often required by Mortgage Lenders when financing a home. Those are:
- Homeowner's Insurance (Borrower Generates)
- Private Mortgage Insurance (with <20% down)
- Title Insurance (Ordered by others)
- Flood Insurance (only if in a Flood Plain)
Homeowner's Insurance defined: Homeowners insurance is a form of property insurance that covers losses and damages to an individual's house and to assets in the home. Homeowners insurance also provides liability coverage against accidents in the home or on the property.
Private Mortgage Insurance defined: Private Mortgage Insurance, often referred to as PMI, is insurance provided by a private mortgage insurance company. The insurance protects Lenders against loss (to an 80% Loan Limit) if a borrower defaults on their mortgage. This, in turn, enables Lenders to offer financing options to Borrowers making smaller down payments. (Mortgage Insurance is provided and available through several privately-owned companies.)
Title Insurance defined: Title insurance is a way to protect yourself from financial loss and related legal expenses in the event there is a defect in title to your property that is covered by the policy. Title insurance differs from other types of insurance in that it focuses on risk prevention, rather than risk assumption.
With title insurance, title examiners review the history of your property and seek to eliminate title issues before the purchase occurs. Title insurance comes with no monthly payment. It’s just a one-time premium paid at closing.
Flood Insurance defined: Flood insurance is a type of property insurance that covers a dwelling for losses sustained by water damage, as it specifically relates to flooding. A separate coverage rider is needed to cover sewer backup if the backup was not caused by the rising floodwaters. In some places, this is considered a major event if you do not get supplemental insurance.
Homeowner's Insurance is required by most Lenders in almost all states in every transaction. Homeowner's Insurance is a cost paid by Buyers to cover the home being purchased or refinanced. This insurance's payment is typically quoted in annual payment amounts but paid monthly by the Borrower via the escrow portion of their monthly payment.
Borrowers purchase their own Homeowner's Insurance after seeking quotes from Insurance Providers. The Mortgage Lender normally has minimal requirements regarding Homeowner's Insurance coverage, so it's important that Borrowers are aware and seek coverage that will satisfy those minimal coverage needs.
Once a Borrower determines its insurance company of choice, the Mortgage Lender and insurance company/agent coordinate together to finalize the Insurance Policy. A "Certificate of Insurance" or Declaration Page must be sent to the Lender as proof of coverage. Often proof of the first year's insurance premium being paid is needed as well.
The monthly Homeowner's Insurance escrow payment is determined by dividing the Homeowner's Annual Premium by 12 (12 months). As a result, most mortgage payments end up with the following monthly components:
- Principal & Interest (Repays the Home Loan)
- Homeowner's Insurance (Escrow payment calculated as explained above)
- Real Estate Taxes (Calculated in the same manner as HOI)
- Private Mortgage Insurance (PMI ... if needed)
Mortgage Lenders can select Private Mortgage Insurance options from a variety of Mortgage Company Insurers. In essence, the originating Mortgage Lender can "shop" for the best price (lowest costing) option for the Home Buyer (the Borrower).
The following factors are what are used by Lenders to determine the eventual "premium" paid by a Borrower ... paid (typically) in the form of a monthly charge and typically included by the Mortgage Lender in the Monthly Mortgage Payment (see above breakdown).
- Borrower's Credit Profile
- Debt-to-Income Ratio
- More ...
Title Insurance is "updated" each time a property is bought/sold. Issuance of a Title Policy occurs after thorough research is completed on a property.
The research is conducted to make sure that there are no pending legal issues, record defects, unpaid taxes, errors regarding ownership or undisclosed deeds do not exist on the property being transacted ... and that the Title is what they call "clean".
Two Title Insurance policies are involved in the typical transaction. One is the Owner's Policy. The other is the Lender's Policy.
The Lender's policy must (at minimum) cover the amount of monies being borrowed. It must also contain an endorsement naming the Mortgage Lender first in line for repayment, should a home enter foreclosure. As noted above, the cost of Title Insurance is paid at the time of Closing and is a one-time charge.
Note: It is important for Borrowers to be aware that many Title Insurance companies exist and that title costs can vary greatly between them.
While Flood Insurance can be carried on any property, it is required on properties located within a designated flood zone and being financed by a federally backed mortgage.
It is the Federal Emergency Management Agency that actually maps the flood zones located across the country. FEMA also assesses and "rates" flooding risk and intensity by zone.
However, it is the National Flood Insurance Program (NFIP) that regulates the prices for flood insurance policies, so the cost for a policy will not vary between sales agents.
The cost of a flood insurance policy is based on:
- Property Location Zone
- Property Age
- Number of Floors located on Property
With so many different types of insurance that may be required within a transaction, it is easy to understand why borrowers can get confused ... especially when a first-time homebuyer.
It highlights and escalates the importance of finding and working with a Mortgage Lender that will take the time to answer questions and educate borrowers regarding all facets of the mortgage process.
Armed with the knowledge you need and the right lending professional at your side, you can rest assured that you are gaining the information and guidance you need to make the best decisions regarding your insurance decisions and home financing ...
Contact me today. I'll put my 40+ years of mortgage experience hard to work on your behalf.
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