What’s with all the different types of insurance I have to buy when I purchase a home?
Ok, so, you didn’t set out to become an insurance expert – all you wanted to do was buy a house, after all. Yet, in the process, you ran up against at least four different types of insurance – and these are just the mandatory policies.
We are willing to bet that you never dreamed you would learn so much about insurance as you have during the home-buying process. From PMI to hazard insurance EVERYONE has their hand out, wanting to make sure their interests are covered.
Think title insurance is frivolous?
A Utah couple put their home on the market and quickly found a buyer. Escrow was opened and the title search was ordered. During the process, the title company discovered a lien against the property, which happens frequently. What happened in this case is when the homeowners originally bought the home, the sellers lent them some money for the purchase. This loan created a lien against the property.
The escrow company contacted the original homeowners (the originators of the loan) and informed them that the folks they lent the money to were selling the home and, thus, paying off the loan. The lien could be removed, right?
When dealing with reasonable people the answer would be yes. Unfortunately, the original homeowners turned out to be quite disagreeable and refused to take the payment in full for the money they lent. They offered no explanation.
The sellers worked overtime, trying to get the uncooperative former owner to accept the loan repayment. When the closing date came and went, the buyers for their home ― a family of five ― were forced to move into a weekly apartment because they’d already given notice to their landlord.
Finally, the original homeowner came forward and demanded more money than what was owed. To get their buyers out of the weekly rental and to move on with their own lives, the sellers paid the former owner more than what they owed.
There is a moral to this story, which I’ll get to in a minute. First, let me explain what title insurance is and how it works. When a home goes under contract, the lender demands a search of the home’s title to determine that the homeowner is truly the owner of the property and that nobody else has a full or partial claim to it. The title search will also reveal outstanding judgments or liens against the property, information about unpaid taxes and many other issues.
After the title search, the title company will release a summary of its findings, typically called an abstract of title or a preliminary title report, and an opinion about the validity of the property’s title.
If the lender sees anything negative it will refuse to issue the funds and the home will not close until the problem is cured. If, on the other hand, the researcher validates the title, the lender will proceed, with the requirement that the buyer purchase an insurance policy to protect it against any claims that weren’t found during the research. This is commonly known as the lender’s title policy, although there is also an optional owner’s policy that protects the new homeowner as well. The lender’s policy only protects the lender, even though it doesn’t pay the premium, the buyer or the seller does.
So, the moral of the original story about the Utah homeowners is that home sellers should order a title report before actually going under contract with a buyer. You never know what might turn up and most clouds on title take time to remedy – time you won’t have once there is a closing date.
Nobody likes PMI
Private mortgage insurance (PMI) has been in the news a lot over the past few years. FHA raised and then lowered the costs of its premiums (which they call the Mortgage Insurance Premium or MIP) and that hit the headlines. Then the advice columns on how to get rid of PMI started making the media rounds. American homeowners try desperately to rid their house payment of the PMI premium.
PMI covers only the lender and will kick in if you default on the loan. It is required for most loans when the buyer pays less than 20 percent of the purchase price for a down payment. This is, in a nutshell, the price borrowers pay for low down-payment loans. Without it, you’d have to come up with 20 percent of the purchase price of the home. So, it’s not entirely “useless” after all. Annoying, yes.
Let’s talk about homeowner’s insurance
Homeowner’s insurance is another lender-requirement but the homeowner also benefits in the case of a claim. Hazard insurance is a part of a homeowner policy.
Homeowner’s insurance coverage varies from the basic theft, weather damage and fire to more- costly coverage including that for earthquake or flood damage. The lender will let you know which basic coverage you will need to purchase.
The whole topic of insurance is confusing to most folks and when you are trying to cover such an expensive investment the only counsel you should obtain is that of an experienced and knowledgeable insurance agent.
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