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Old 06-07-2015, 05:11 PM
 
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We live in Massachusetts and just received a letter from our lender stating a deficiency in hazard insurance coverage. They are requiring we double our coverage from $372,200 to $744,400. Our house appraised for a total value (land and dwelling) of $400k a few months ago. As far as I knew, in Massachusetts, a lender cannot require your coverage exceed the cost of replacing the dwelling. Is this correct? And if so, could anyone direct me current laws or documents supporting this?

I will be calling both our lender and insurer tomorrow to deal with this. This must be a mistake right?
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Old 06-08-2015, 02:54 AM
 
Location: Phoenix, AZ area
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Your insurance has to cover the cost to replace, which is very different than the appraisal. Call your insurance agent and ask for a full replacement coverage and see what they say.
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Old 06-08-2015, 06:55 AM
 
Location: East of Seattle since 1992, originally from SF Bay Area
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It's not based on value, like taxes, it's based on cost to replace it. If the local construction labor and materials cost go up, so does the insurance.
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Old 06-08-2015, 02:14 PM
 
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Originally Posted by AZ Manager View Post
Your insurance has to cover the cost to replace, which is very different than the appraisal. Call your insurance agent and ask for a full replacement coverage and see what they say.
I'm kind of curious, why do either the appraisal or the cost to replace matter in terms of coverage for the lender. In theory, shouldn't the max they can require as far as coverage goes be the amount of the mortgage?

If you had a $50k mortgage on a $1million home, as long as the coverage can pay off the mortgage, why should the lender care(and more importantly have the right to care).

Just doesn't seem to make sense to me. As far as a "What should you have" amount, sure, it's in your best interest to have the cost to replace amount, but the lender isn't responsible for that.
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Old 06-08-2015, 02:20 PM
 
Location: Phoenix, AZ area
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Quote:
Originally Posted by Jeo123 View Post
I'm kind of curious, why do either the appraisal or the cost to replace matter in terms of coverage for the lender. In theory, shouldn't the max they can require as far as coverage goes be the amount of the mortgage?

If you had a $50k mortgage on a $1million home, as long as the coverage can pay off the mortgage, why should the lender care(and more importantly have the right to care).

Just doesn't seem to make sense to me. As far as a "What should you have" amount, sure, it's in your best interest to have the cost to replace amount, but the lender isn't responsible for that.
Just to play devil's advocate here real fast given your scenario if that home burns to the ground but only has $50k worth of insurance the insurance pays that to the homeowner not the lender. Once the owner gets the $50k they stop paying on their property because there's nothing there and not enough money to demolish much less rebuild. The bank forecloses on the property but now has to try to sell a burnt down home or spend the money to demolish the home and rebuild it with current building codes before they can get rid of it. All the while they are already out the $50k from the remaining balance.

Oh yeah and you have to keep full replacement coverage as part of the terms in your mortgage contract with the lender.
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Old 06-08-2015, 02:36 PM
 
2,303 posts, read 2,133,722 times
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Quote:
Originally Posted by AZ Manager View Post
Just to play devil's advocate here real fast given your scenario if that home burns to the ground but only has $50k worth of insurance the insurance pays that to the homeowner not the lender. Once the owner gets the $50k they stop paying on their property because there's nothing there and not enough money to demolish much less rebuild. The bank forecloses on the property but now has to try to sell a burnt down home or spend the money to demolish the home and rebuild it with current building codes before they can get rid of it. All the while they are already out the $50k from the remaining balance.

Oh yeah and you have to keep full replacement coverage as part of the terms in your mortgage contract with the lender.
Gotcha, for some reason I assumed that the lender had first access to the proceeds from the insurance claim. Not sure why I thought that, but that difference is why it makes sense.

Thanks.
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Old 06-08-2015, 03:51 PM
 
Location: Morrisville, NC
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How did you come to the insured value to begin with? Most insurance companies will do some sort of check on the amount and unless it is s special type of policy,mthey are not going to insure a $400k house for $700 k anyway. They call that a moral hazard. If you did ask them to increase it, it would be interesting to see what the agent comes back with.
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Old 06-08-2015, 08:33 PM
 
Location: MID ATLANTIC
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I am puzzled by this, lenders require coverage to equal the loan amount, or, the cost to rebuild if less. The mortgagee clause names lender as 1st to be paid in the event of a casualty.
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Old 06-09-2015, 01:42 AM
 
Location: Phoenix, AZ area
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Originally Posted by Jeo123 View Post
Gotcha, for some reason I assumed that the lender had first access to the proceeds from the insurance claim. Not sure why I thought that, but that difference is why it makes sense.

Thanks.
Depends on the exact working in your loan, I've had 2 done this year and both are a little different. My personal loan says that my insurance amount and duration are determined by the lender which means they can change those amounts at any time. As for the payouts on my personal property they first pay any back/late payments before rebuilding if there are any behind payments. Not all loans are made the same but this should be the normal wording for home loans. Car loans pay off the loan first always then refunded to the owner second.
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Old 06-09-2015, 08:45 AM
 
Location: Kansas City North
3,631 posts, read 6,798,556 times
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Quote:
Originally Posted by Jeo123 View Post
Gotcha, for some reason I assumed that the lender had first access to the proceeds from the insurance claim. Not sure why I thought that, but that difference is why it makes sense.

Thanks.
That's been my experience. Check made out to both bank and myself. They endorsed it and turned over to me for roof replacement. Then they sent an inspector to make sure I actually did replace it.
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