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I have been trying to read about this and I cannot seem to get a clear answer. I did see one discussion on here from quite awhile ago so I thought I would ask here again.
I am near close on a home. Supposed to close on 5/5/2016. Today my lender says my home owners insurance coverage isn't enough. The house is 735k and my insurance covers the cost to rebuild the structure if it burns down which is 440k. My lender is now stating that I need coverage for 587k (the actual amount I am borrowing as I put down 20%). Yes I am in California.
My questions are...
1. Can the lender do this? My insurance agent stated that this makes no sense. That the cost of the rebuild is all that I need and to force me to OVER insure is unethical. The insurance company will not cover the loan amount. In fact her response was "We are not insuring the loan. We are insuring the rebuild of the structure, home on the land. We are not insuring the land or prime location of the property which is all included in the value of the loan. We are insuring the dwelling with extended replacement cost at $440,000 which is $230 a square foot. This is more than sufficient coverage. We will not insure the loan amount and it is unethical. If the buyer decides he wants the additional coverage to over insure his home, then we can have that discussion."
2. Why would they require the extra coverage? If the house does burn down do I get the full 587k even though the cost to rebuild would only be 440k? If not, where does this extra money go?
3. Do I have any leg to stand on? What if I say no? Will the loan just not happen? Can they force my hand? Seems like a rip off to me.
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My broker states "What we are asking is not unusual. These are standard requests that underwriters are required to abide by as per the government legislation that was enacted in 2009. If your current agent is either unable or unwilling to provide this, I have other agents I could refer you to who could have this done rather quickly. 1. Per Fannie Mae's website - the unpaid principal balance of the mortgage, as long as it at least equals the minimum amount
2. Per Fannie Mae's website - 100% of the insurable value of the improvements, as established by the property insurer. Insurance agent to provide replacement cost estimator to source that the insured amount is sufficient.
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Does anyone have any insight as to laws and who is right and what I can do if anything. Thanks.
For a first mortgage secured by a property on which an individually held insurance policy is maintained, Fannie Mae requires coverage equal to the lesser of the following:
100% of the insurable value of the improvements, as established by the property insurer; or
the unpaid principal balance of the mortgage, as long as it at least equals the minimum amount—80% of the insurable value of the improvements—required to compensate for damage or loss on a replacement cost basis. If it does not, then coverage that does provide the minimum required amount must be obtained.
For a first mortgage secured by a property on which an individually held insurance policy is maintained, Fannie Mae requires coverage equal to the lesser of the following:
100% of the insurable value of the improvements, as established by the property insurer; or
the unpaid principal balance of the mortgage, as long as it at least equals the minimum amount—80% of the insurable value of the improvements—required to compensate for damage or loss on a replacement cost basis. If it does not, then coverage that does provide the minimum required amount must be obtained.
Improvements are the structures built on the land: the home and any outbuildings such as a detached garage or barn.
100% of the insurable value of the improvements, as established by the property insurer is the amount the insurer will pay to replace the dwelling and outbuildings. It does not include the value of the lot. That's the $440,000 you have already been told, and that's the amount of insurance coverage you want to buy. Less would not cover total loss of the buildings.
The mortgage lender is willing for you to buy an amount of insurance to cover what you owe on the loan, but it must be at least 80% of what it would cost to replace the improvements. In your case, the amount of the loan is well over 80% of the cost of the improvements; it's over 100%. Since you may choose the lesser of the two options, you do not have to buy that much coverage.
There is absolutely no reason for the lender to demand that you buy more coverage than the $440,000 it would take to rebuild. I am assuming the house is not in a location where there might be a risk of a natural disaster that would render the lot unusable. It's not possible your house and lot will fall into the Pacific, is it?
On your appraisal, typically page 3 or 4, what did the appraiser (not the insurance company) put as the cost to rebuild?
Replacement cost is not always replacement cost (I learned that the painful way - and I had a Nationwide policy that I thought was the gold standard of insurance).
You must be covered for the loan amount or the appraiser's cost to rebuild.
Is the amount of additional insurance premium that it would cost to cover the additional $137k really worth all this extra effort on your part? The premium amount on the extra $137k in CA is probably less than $300 extra a year. The mortgage company is going to require what it's going to require and nothing you do or say is going to change their mind.
And of course they're going to require that you have coverage at least up to the loan amount because if the house burns down the day after closing and you decide to walk away and stop paying the loan, the mortgage company is out that $137k difference between what insurance will cover and the amount they lent you on a structure that no longer exists.
Is the amount of additional insurance premium that it would cost to cover the additional $137k really worth all this extra effort on your part? The premium amount on the extra $137k in CA is probably less than $300 extra a year. The mortgage company is going to require what it's going to require and nothing you do or say is going to change their mind.
And of course they're going to require that you have coverage at least up to the loan amount because if the house burns down the day after closing and you decide to walk away and stop paying the loan, the mortgage company is out that $137k difference between what insurance will cover and the amount they lent you on a structure that no longer exists.
Most require appraiser's cost to replace or the loan amount, whichever is less.
Is the amount of additional insurance premium that it would cost to cover the additional $137k really worth all this extra effort on your part? The premium amount on the extra $137k in CA is probably less than $300 extra a year. The mortgage company is going to require what it's going to require and nothing you do or say is going to change their mind.
And of course they're going to require that you have coverage at least up to the loan amount because if the house burns down the day after closing and you decide to walk away and stop paying the loan, the mortgage company is out that $137k difference between what insurance will cover and the amount they lent you on a structure that no longer exists.
If the house burns down and is bulldozed, the value of the land is still there.
The lender will also require mortgage insurance, which protects them against default on payment. Property insurance is separate, and it is silly to buy more than you need. You can buy $537K, but the insurer at most will pay $440K.
Quote:
Originally Posted by SmartMoney
Most require appraiser's cost to replace or the loan amount, whichever is less.
That's how I interpret OP's second post. Lender wants him to buy an amount higher than replacement cost, though.
Improvements are the structures built on the land: the home and any outbuildings such as a detached garage or barn.
100% of the insurable value of the improvements, as established by the property insurer is the amount the insurer will pay to replace the dwelling and outbuildings. It does not include the value of the lot. That's the $440,000 you have already been told, and that's the amount of insurance coverage you want to buy. Less would not cover total loss of the buildings.
The mortgage lender is willing for you to buy an amount of insurance to cover what you owe on the loan, but it must be at least 80% of what it would cost to replace the improvements. In your case, the amount of the loan is well over 80% of the cost of the improvements; it's over 100%. Since you may choose the lesser of the two options, you do not have to buy that much coverage.
There is absolutely no reason for the lender to demand that you buy more coverage than the $440,000 it would take to rebuild. I am assuming the house is not in a location where there might be a risk of a natural disaster that would render the lot unusable. It's not possible your house and lot will fall into the Pacific, is it?
This Pacific comment made me smile. Thank you. I need that. No, there isn't really much of a chance of the house falling into the pacific. I'm pretty far away from that. The insurance is claiming that what they are trying to do is fraudulent. And she is standing by her word. I'll see how this turns out.
Is the amount of additional insurance premium that it would cost to cover the additional $137k really worth all this extra effort on your part? The premium amount on the extra $137k in CA is probably less than $300 extra a year. The mortgage company is going to require what it's going to require and nothing you do or say is going to change their mind.
And of course they're going to require that you have coverage at least up to the loan amount because if the house burns down the day after closing and you decide to walk away and stop paying the loan, the mortgage company is out that $137k difference between what insurance will cover and the amount they lent you on a structure that no longer exists.
Actually, that is kinda my question. So if the house burns down, and I walk away.. aren't they still able to claim the land? And shouldn't that cover the 137k difference?
Also, lets say I do go for the full 587k. And the house burns down... Do I get the full 587k? So I rebuild the house for 440k and what? Keep the other 147k? Doesn't this seem like a way to make a lot of money off of an insurance company? Seems highly illegal.
To your point about being worth extra effort... It's really kind of the principle of the thing. My loan is stretching me to the max and and extra few hundred here and there matters. So yes, actually it does kinda matter. If it was like $2 ok that's fine. but if my insurance agent is claiming this is unethical then I tend to look into the matter.
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No, there isn't really much of a chance of the house falling into the pacific. I'm pretty far away from that. The insurance is claiming that what they are trying to do is fraudulent. And she is standing by her word. I'll see how this turns out.
