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We're two days (!!!) from closing on our first home - purchasing the house for $170K, going USDA. Secured the homeowner's binder on Friday - coverage valued at $130 with an automatic 20% increase from my insurance co.
Just now I get an emai saying my lender needs to see a binder with coverage of at least $170K.
My insur. co says this is not possible - it's based on the value of rebuilding the home, excluding the land, etc.
I expect to have this cleared up tomorrow but I was curious if this is standard practice... who is right? How can they demand more if my insur. co. cannot legally offer that much?
I don't know if you already gotten this cleared up, but it worried me when I read it because we're closing on a house in Mass next week and the replacement amount my insurance agent quoted me is about $30k less than our purchase price. The underwriters haven't seen the insurance binder yet, so I don't know if they'll be bothered or not.
I did a little searching and read the Mass Guide to Home Insurance available at http://www.mass.gov/Eoca/docs/doi/Consumer/homeowners_guide.pdf (broken link). It states in no uncertain terms on page 1 that "the lender cannot require you to obtain the coverage from a particular insurer and cannot require you to insure your home for more than the replacement cost of the dwelling."
Of course, I don't know how your lender will respond, but that statement doesn't seem to leave much wiggle room for them.
I've had that happen in the past - price of the house was high because of location and lots of land, but replaacement value was lower than mortgage.
They insisted, so I got it for a year (so I could close) and then made adjustments upon renewal. I would imagine it depends on the insurance company if they go along with it...
The language of Massachusetts is not unique -- several states have the same basic idea. You cannot be forced to over-insure. Generally most experienced insurance and mortgage people know the key phrases to look for when reviewing the coverage and the OP probably has one or more people that do not understand what they are reading.
This should be cleared up quickly because the insurer is almost certainly CORRECT that the binder is going to ensure that the house can be rebuilt ON THE EXISTING LAND for the amount of the insurance. The mortgage people have to accept that, and probably are misreading the part of their internal guidelines.
Escalate to more experienced supervisors, hopefully they are not too overbooked with the expiring tax incentives...
The problem you're having is this, you're purchasing the property for a higher value than it's appraised replacement value. So by law, absolutely yes the lender can ask you to have an adequate amount of insurance to cover what you've financed, they have to protect their investment.
The alternative is find another lender.
Replacement value is a completely subjective metric, for example if you have a historic home, lenders or insurance comapnies can require you to carry up to 4 times the actual value of the property to cover "replacement costs" for rare/hard to find materials..like 200 year old timber. Shop around man, I hate to say it because I work in the industry, but people tend to get over on First time buyers.
The problem you're having is this, you're purchasing the property for a higher value than it's appraised replacement value. So by law, absolutely yes the lender can ask you to have an adequate amount of insurance to cover what you've financed, they have to protect their investment.
I don't think that is true. The land isn't going to burn down or blow away, so if the house is a total loss, you still own the land. Like chet said, the insurance only covers replacement value of the HOUSE. The loan is for the full value of HOUSE + LAND.
I don't think that is true. The land isn't going to burn down or blow away, so if the house is a total loss, you still own the land. Like chet said, the insurance only covers replacement value of the HOUSE. The loan is for the full value of HOUSE + LAND.
This certainly makes sense. Once the house is rebuilt the total of the house plus the land would be the purchase price.
Thank you for all the feedback! Yes, this did get resolved -
Quote:
Originally Posted by MaCtCouple
I don't know if you already gotten this cleared up, but it worried me when I read it because we're closing on a house in Mass next week and the replacement amount my insurance agent quoted me is about $30k less than our purchase price. The underwriters haven't seen the insurance binder yet, so I don't know if they'll be bothered or not.
I did a little searching and read the Mass Guide to Home Insurance available at http://www.mass.gov/Eoca/docs/doi/Consumer/homeowners_guide.pdf (broken link). It states in no uncertain terms on page 1 that "the lender cannot require you to obtain the coverage from a particular insurer and cannot require you to insure your home for more than the replacement cost of the dwelling."
Of course, I don't know how your lender will respond, but that statement doesn't seem to leave much wiggle room for them.
I wouldn't be worried - my insur. rep says this happens all the time. And my lawyer's office (Speaking through a message from my lender) got her info mixed up. Basically what happened was there was some very fine line in the multipage appraisal report that stated the rebuild value of the house (which was about $158). So the lender required my insurance cover the rebuild cost - After we explained my current coverage and 20% additional - all he needed was paperwork stating that from my insur. co and we were squared away.
Quote:
Originally Posted by Lacerta
I don't think that is true. The land isn't going to burn down or blow away, so if the house is a total loss, you still own the land. Like chet said, the insurance only covers replacement value of the HOUSE. The loan is for the full value of HOUSE + LAND.
This is how my insur. agent described it to me: Basically she said sometimes lenders try to make you buy more insurance than you'll ever use. You just need to cover the property, ex-land. Like someone said, if something happened to the house, the land would still be there.
In summary, a lender can only require you to purchase enough insurance to cover the full price of your home purchase, minus the value of the land (according to the appraisal report)? Does the percentage of down-payment or the overall value that you owe the lender have anything to do with it?
For example, the property is purchased for $200k. It appraises at $200k. The land value is declared at $100k. The mortgage comes with a $40k down-payment (20%). Thus, the mortgage is $160k.
Based on the information, the homeowners insurance must cover $100k ($200k property value minus $100k land value), right?
I know this is a very old post---I am an insurance broker in CA and licensed in TX. I represent many companies. I was actually doing a Google search to send something to the Dept of Insurance on this very subject. I will tell you what I tell the lenders when they pull this crap which is an illegal practice in most states.
Insurance carriers don't give a flying pink elephant's butt about what your loan amount is, what you paid, the full price of your home, the half price of your home, the value, that your mother's cousin's sister's daughter quit claimed you the house so you paid nothing so your insurance should be free----the ONLY thing we are insuring is the structure. NOT THE LAND! So if it's a shack on a million dollar property and your loan is 950k the insurance is going to cover what it costs to rebuild the SHACK---maybe 50k if it has an outhouse.
Think about it---what do you think happens if the place burns to the ground? Do you think the insurance company just walks over and hands you a check for 950k? NO--the money is put into an escrow account and payments made to the contractor as you rebuild. If it only costs 50k to rebuild you will never see the rest of the $. Different carriers do this slightly differently but what it does not do is pay off the mortgage. If you need mortgage insurance because you may default on the loan then you get mortgage insurance or PMI. It's on FHA loans. What you DON'T do is insure the structure to match the loan amount bc we aren't gonna pay on that. And you can't over-insure a property so much that the UW of the insurance company goes--wait----what gives---we have a 2BR 1BA at 500K Dwelling coverage? Is it made of gold?
We also don't come up with the reconstruction costs off the tops of our heads. We have to enter in the features of the property into an approved reconstruction cost estimator like Marshall & Swift or 360 Value and IT calculates an amount for us that is kept on file and the features sent to the insured so they can verify what was used to get their reconstruction cost.
Okay---off to my search for the TX bill that says this is an illegal practice so I can show it to compliance at the DOI in CA. Good night.
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