But there’s one charge that military borrowers can’t escape — the VA Funding Fee.

The VA Funding Fee is a set fee applied to every purchase loan or refinance. The proceeds go directly to the VA and help cover losses on the few loans that go into default. In essence, the Funding Fee helps keep the VA Loan Guaranty program afloat.

The fee changes slightly depending on the down payment amount, whether the borrower has a prior VA loan and the nature of the borrower’s service. There are exemptions for borrowers with service-connected disabilities and for qualifying surviving spouses.

Fee Schedules

For home purchases, regular military members pay slightly lower Funding Fees than Reservists and National Guard members. Here’s a look at the fees on purchase loans for regular military:

The percentages shift slightly for members of the Reserves and the National Guard:

Funding Fee Sources

Veterans aren’t required to come up with the Funding Fee from their own pocket. Borrowers can roll the cost into their loan amount, which adds a few dollars onto their monthly mortgage payment. For example, the 2.5 percent funding fee on a $200,000 mortgage comes out to $5,000. On a fixed-rate loan at 30 years and 6 percent, rolling in the funding fee adds an additional $30 per month.

Veterans refinancing their loans must also pay a Funding Fee. The VA has two major refinancing programs, the Interest Rate Reduction Refinancing Loan, better known as the VA Streamline, and a VA cash-out refinancing. For the no-frills Streamline, veterans are required to pay a 0.5 percent Funding Fee (that’s one-half of 1 percent).
Veterans who want a cash-out refinance pay a little more than their Streamline counterparts. The current fee for a first refinance is 2.15 percent of the loan amount for regular military and 2.4 percent for Reserves and National Guard members. The fee jumps to 3.3 percent for both demographics for each subsequent refinance.

____________________

About the author: Chris Birk writes about real estate and the mortgage industry for a host of sites and publications, including Bigger Pockets, Mortgages Unzipped and Scotsman Guide. A former newspaper and magazine writer, he is also content director for a leading VA lender.

How The VA Funding Fee Really Works is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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For instance, in many communities the water company is actually a governmental agency. Don’t pay your water bill and there can be a lien against the property, Don’t pay the lien and the property can be foreclosed. Think about it the next time you take a shower….

And then, of course, we have property taxes. Fail to pay your property taxes and your house can be sold at auction to pay the debt.

Foreclosure Taxes

Taxes take precedence over any other claims. This is the reason why lenders want to escrow money each month from those who buy with less than 20 percent down. Lenders absolutely want to assure that property taxes are paid because otherwise their security for the loan — the house — could be at risk.

The deal with property insurance is a little different. Don’t pay your property insurance and you will be in violation of your mortgage agreement. Break your mortgage agreement and…you guessed it, you can be foreclosed.

Lenders also escrow money to pay property insurance premiums for those who purchase with less than 20 percent down. Again the reason is to protect the lender’s security. The lender does not want the house to burn down if only because the security for the loan will then have a reduced value.

I used to think that borrowers were better off paying their own taxes and insurance so they could control the money and perhaps get some interest, but now I prefer to have the lender collect the money each month as part of the mortgage payment. Why? Property taxes have turned into huge bills and it’s easier from a budgeting perspective to pay a little each month rather than a huge amount when taxes are due.

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Since the program began in 1934 the government has insured more than 37 million mortgages under Federal Housing Administration (FHA). Today you can get 30-year and 15-year loans insured under the FHA program. These loans can be fixed-rate or adjustable. In addition, the FHA also insures reverse mortgages.

The FHA does not insure all loans. Instead it only insures mortgages which meet its standards. If it’s an FHA mortgage you can be certain that the loan features little down (3.5 percent plus closing costs), forbids prepayment penalties and does not contain those infamous “gotcha” clauses found in toxic mortgages.

Insurance Premiums

FHA interest rates are established in the marketplace and not by federal regulation. The government guarantees the loan’s repayment to a lender, an incentive that greatly benefits borrowers because lenders will finance a home with little down if a borrower is backed by FHA insurance.

To obtain an FHA-insured loan under what is generally known as the FHA 203(b) program, one must pay FHA insurance. At this time, the upfront insurance fee is generally equal to 2.25 percent of the amount borrowed PLUS an annual fee equal to .55 percent of the loan amount.

In other words, if you borrow $150,000 there’s an upfront FHA mortgage insurance premium (known as an MIP) of $3,375. This fee can be financed with the mortgage, meaning you do not have to pay it in cash at closing. Instead, the upfront MIP is added to the loan amount.

In addition to the upfront MIP there’s also an annual MIP equal to .55 percent of the remaining mortgage balance. If you owe $150,000 then the monthly fee will be equal to $150,000 x .55 divided by 12 or $68.75. Since the loan balance falls a little with each mortgage payment, so does the monthly MIP cost.

Canceling FHA Mortgage Insurance

Generally the FHA MIP is automatically canceled after 15 years or if the loan-to-value (LTV) ratio of the mortgage falls to 78 percent of the original debt. The MIP cannot be canceled in less than five years.

FHA Refunds

When the FHA was first established it was designed to be a mutual insurance program. This means that borrowers — the equivalent of policyholders in a private mutual insurance company — would benefit when the program made a profit. In the case of the FHA, the way this was done was to pay borrowers a refund after their loan was paid off (perhaps when the home was sold).

The FHA’s First 25 Years

Unfortunately, the FHA refund program was ended with loans originated after December 8, 2004. The government now pockets any profit from the program.

If you have a loan originated prior to December 8, 2004 you can see if you qualify for a refund WITHOUT any cost or charge by going to the FHA refund page. You’ll need your loan case number to use the system. This should be available on your closing papers from settlement.

FHA Loan Limits

Historically the amount you can borrow with FHA financing has been less than the amount available with a conventional loan. At the end of 2008, however, the system was changed. Now there are at least three sets of FHA loan limits — a basic loan limit, a loan limit for “high cost” areas in the continental U.S. and a third loan limit for properties in Alaska, Hawaii, Guam and the Virgin Islands.

There are different FHA loan limits for single-family, duplex, triplex or four-unit properties. The loan limit increases with the number of units.

Under the FHA program you can buy a property with up to four units, but you MUST live in one of the units to qualify for financing. Pure investment financing under the FHA program is currently prohibited.

To make matters more complicated the FHA loan limit can differ even within a state. This happens because the limit is based on the county where you live. Also, the FHA loan limits can change, typically at the end of the year.

It sounds complicated but actually the system is fairly straight-forward. Just check the latest FHA loan limits and look at the chart for your county.

Reverse Mortgages

The FHA insures most reverse mortgages originated in the US. Because the reverse mortgage program has had recent losses, borrowers should see if the program is available and how much cash can be raised from financing your home. Be certain to get independent advice from an attorney who specializes in “elder law” or a fee-only financial adviser BEFORE signing up for any reverse mortgage program.

Be aware that the FHA reverse loan limit is different than the limit for properties under the 203(b) program.

Buy & Repair Loans

In addition to the 203(b) program, the FHA also has a 203(k) plan for residential purchasers (but not for investors). Under 203(k) you can get financing to buy a home and to also make repairs and improvements. This program has a number of standards and requirements which differ from the 203(b) plan so speak with lenders for specifics.

How Much Can You Borrow?

Lenders qualify borrowers in part on the basis of their income. In general terms, under the FHA program no more than 31 percent of your gross (pre-tax) monthly income can be used for housing costs such as mortgage principal, mortgage interest, property taxes and property insurance (PITI). As much as 43 percent of your income can be used for PITI plus recurring bills such as credit card payments, auto loans, etc. These numbers are sometimes expressed as 31/43.

Let’s imagine that you have two household members with a combined income of $90,000 annually or $7,500 per month before taxes. Under general FHA rules, the buyers would be allowed to spend as much as $2,325 on housing costs (PITI) and as much as $3,225 for all regular monthly debt.

Higher ratios are available with energy efficient FHA loans (33/45) and under the government’s HAMP mortgage modification program (31/55).

Streamline Refiancing

Under new streamline refinancing rules established in November 2009, HUD will refinance FHA loans under the following basic conditions:

• The borrower has made the last six payments in full and on time.
• For mortgages with less than a 12 month payment history, the borrower must have made all mortgage payments within the month due.
• For mortgages outstanding more than a year, the borrower is allowed no more than one 30-day late payment in the preceding 12 months and has made all mortgage payments within the month due for the three months prior to the date of loan application.
• The refinancing must result in a reduction in the total mortgage payment (principal, interest, taxes and insurances, homeowners’ association fees, ground rents, special assessments and all subordinate liens) or allow the borrower to move from an adjustable rate mortgage (ARM) to a fixed rate mortgage or reduce the loan term. In other words, there must be a net tangible benefit.
• If subordinate financing such as a second mortgage or home equity loan remains in place, the maximum combined loan-to-value (CLYV) ratio is 125 percent. For streamline refinance transactions WITHOUT an appraisal, the CLTV is based on the original appraised value of the property. For streamline refinance transactions WITH an appraisal, the CLTV is based on the new appraised value.

As always, speak with lenders for specifics.

Shop Around

Most residential borrowers will be insured under what’s known as the FHA 203(b) plan. Every FHA 203(b) loan has the same terms (length, no prepayment penalty, etc.) as every other FHA 203(b) loan. What may not be the same is the cost: Different lenders can and will change different combinations of interest and points so it pays to shop around and compare rates. One of the best ways to compare loan offers is to ask lenders to provide a quote with “par” interest — the rate with zero points.

How To Apply

In recent years the loan application process has been greatly simplified, however proper information from borrowers is still required. The FHA — to its credit — demands fully-documented loan applications. This may sound intimidating, however it’s not a big deal. Just take these steps:

• At least three months BEFORE you finance or refinance real estate get a copy of your credit report. The reason to do this is to check and see if there’s any information on your credit report which is factually incorrect or out-of-date (most negative items can stay on a credit report for seven years, 10 years for a bankruptcy). You can get a free credit report with no strings attached by going to AnnualCreditReport.com.
• Get your paperwork in order. Have in hand your last three pay stubs, your last three tax returns, and statements for all savings and checking account, mutual funds, retirement accounts, credit cards, student loans, car loans, etc. Make a file and stick the paperwork in it. You want to show ALL income and you must show ALL debts. When in doubt add it to the file.

• Ask some questions: Do you expect to receive “bonus” income now or in the future? Do you expect to receive “overtime” income now or in the future Will “other” income in addition to your salary continue at current levels? If you own your home and use it as a prime residence, what’s the estimated fair market value? What’s the value of all financing now secured by your current home if you’re refinancing?

Seller Contributions

Because it’s tough to sell home these days in many markets, some owners are willing to pay some or even all buyer closing costs. FHA rules allow so-called “seller contributions” of as much as 3 percent to 6 percent of the purchase price to help offset closing costs, depending on the amount you put down. A seller contribution may be used to offset various closing costs however you must always provide your downpayment in cash. Speak with your real estate broker and FHA lender for specifics.

Gifts

Gifts are allowed under the FHA program and gifts may be used to cover some or all of the downpayment. A “gift letter” from the donor will be required. This is a letter which says the money given is really a gift and that no repayment or interest will be sought. Speak with lenders for specifics.

Important Points

___ You do NOT need a co-borrower to apply for a mortgage. However, the additional income represented by a co-borrower may allow you to obtain a bigger mortgage.

___ If you own rental property, lenders will generally add back the depreciation deducted each year on “improvements” such as a house, but not stoves, clothes washers, etc.

___ You are NOT required to disclose the receipt of alimony, child support payments or separate maintenance to a lender. However, disclosure of the additional income represented by such payments may allow you to borrow a larger amount.

___ In addition to the minimum down payment, you may and are likely to have other closing costs as well. Such additional costs can include prepaid expenses, points, mortgage insurance premiums paid in cash, non-realty expenses, taxes, title insurance, transfer fees, settlement charges and miscellaneous costs. Always obtain a Good Faith Estimate from any lender who offers you financing. This government-mandated form outlines the loan-related costs you will be required to pay at closing.

FHA Mortgage Basics is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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The original HUD-1 was developed as a by-product of the Real Estate Settlement and Procedures Act of 1974 — or, as it’s usually called, RESPA. Prior to 1974 settlement forms could be different, meaning that it was very difficult to compare costs or to know what was deductible for tax purposes in the year of the transaction.

So what do we get after 36 years? The new HUD-1 is a vast improvement over the old model. It’s three letter-sized pages long rather than two legal pages, but there’s much more information in the new HUD-1. Buried in the form is an accounting of closing costs and perhaps even some write-offs. Buyers will find the full and complete cost of buying real estate while sellers will see how much cash (if any) they’re getting from the transaction.

Page One

The first page of the form is a summary of the transaction. In effect, it translates the sales contract between buyers and sellers into hard numbers.

At the top of the form we first have administrative data such as:

• The type of loan (conventional, VA, FHA, etc.).
• The place and date of settlement (the date can be very important for tax purposes).
• The mortgage insurance case number (important if you’re ever facing foreclosure).
• The street address of the property. This is a concern because for great clarity and assurance the form would be better if it also included the legal address of the property.
• The name of the settlement (or closing) agent. The party that conducts the settlement is typically regarded as an agent of the settlement process. In other words, they do not represent you.

Page One, Buyer’s Side

The HUD-1 shows transaction costs for both buyers and sellers — you get to see what the other person’s information. More important you get to see your own.

On the right side of the first page we have buyer costs grouped by sections.

Section 100 — This is where buyers see the cost of the property and the cost of settlement (the figure found on line 1400). Combine the two and you get the gross amount — but not the final amount — due from the purchaser.

Notice that there can be some adjustments in this section. For instance, it may be that the seller has paid local property taxes in advance — those payments would be a credit to the seller and a cost at closing to the buyer.

Section 200 — As a buyer you may have certain credits to offset your gross costs. Credits include such things as your deposit, your new loan (for closing purposes the mortgage is a credit to the borrower because it represents money brought into closing) and any additional financing.

In the 200 section you can also see adjustments which are a credit to the buyer. For instance, maybe the seller still owes some property taxes.

Section 300 — This is a re-cap of all costs and credits. If you take the gross amount due from borrower (line 120) and subtract the buyer’s credits and cash you then get the total cash due to — or from — the borrower.

Most buyers, of course, will need to bring “cash” to settlement. By “cash” what most settlement agents really want is a certified check or a cashier’s check. Also, it may be possible to wire funds to the closing agent. Always ask the settlement provider well in advance of closing how payment can be made.

Gifts: To assure lenders that you are not somehow getting a secret loan from someone, it’s best to have closing funds in your name and on deposit for at least 90 days. If you are getting a gift to close, ask your lender how the gift is to be documented and precisely follow the lender’s instructions.

Page One, Seller’s Side

Settlement is a moment of truth for owners, the time when you find out exactly how much or how little you’re getting from your sale.

Section 400 — The sale price of the house, plus the cash paid for any personal items, are shown here as credits to the owner.

Also in this section are adjustments — credits for property taxes and other costs paid in advance.

Section 500 — If any mortgage debt remains unpaid it shows up here as a cost to the seller. Also, the costs of closing (line 1400) are here as a deduction as well as any adjustments for such costs as unpaid property taxes.

Section 600 — If we take the gross amount due to seller (line 420) and subtract the seller’s closing costs (line 520) we can then see how much cash the owner will get from closing (or, how much cash is needed to close if the seller is upside-down).

Practices around the country regarding cash to owners at closing vary. In some areas there are “wet” settlements where the owner gets a check at closing, in other areas there are “dry” closings where it takes a few days to get a check because it takes time for the lender to fund the transaction and paperwork to be recorded. In some jurisdictions there are rules requiring the disbursement of cash with a few days. For specifics, speak with your settlement agent.

Page Two

On the second page of the new HUD-1 we have a series of sections which show costs that may be paid by either buyers or sellers — or split between them. In other words, these are costs which can be negotiated when a sale offer is made. For instance, in a slow market a seller might agree to pay all transfer taxes. In a hot market, the buyer might pay.

Section 700 — If one or more real estate brokers are involved in the transaction, this section will show the compensation to each broker and the cost, if any, to buyers and sellers.

Section 800 — Getting a mortgage is hardly free. When the buyer applied for financing the lender provided a Good Faith Estimate of Closing Costs (GFE) on the new form developed by HUD. This section shows such costs as points, origination charges, appraisal fee, credit report and tax service. Borrowers should check the numbers at closing with the estimates provided in the GFE. The costs shown on lines 801 (origination charge), 802 (points), and 803 (adjusted origination fee) must be the same as the GFE.

Please see our guide to the new Good Faith Estimate form to see how it’s coordinated with the equally-new HUD-1.

Section 900 — Closing is scheduled at a time which is mutually-agreeable to the buyer and seller. That time, however, will mean that for such items as interest, mortgage insurance premiums and homeowner’s insurance there will likely be a need to make some payments for daily costs in advance until the next billing period.

Section 1000 — If you purchase a home with less that 20 percent down the lender will likely require that you pay additional amounts each month for property taxes and insurance. This money is held in an escrow or trust account and then paid out as the bills come due.

If you will have an escrow account then the lender will typically collect money in advance from borrowers to assure that the escrow account is properly funded.

Section 1100 — As part of the buying process, sellers typically promise to deliver good, marketable and insurable title — and buyers should want nothing less. This section shows the costs for title insurance — both lender’s and owner’s coverage.

Lender’s cover — which is required by lenders if you finance the purchase — protects you up to the remaining loan balance in the event of a title claim. In other words, it protects the lender.

Owner’s coverage protects you if there is a title claim up to the purchase price of the property — in other words the loan amount plus your equity. Be aware that some title insurance policies have an inflation rider so that the value of the coverage can actually increase over time. For specifics, speak with your title agent.

Also, take a look at line 1107. This shows the commission paid to the settlement agent for providing title insurance.

Section 1200 — This is where you can see how much state and local governments are getting from the transaction. Governments are elated when homes are sold because such transactions are a major source of revenue. Government taxes can includes such things as deeds, releases, transfer taxes, state taxes, stamps, etc. Call it what you will, a tax is a tax.

Section 1300 — This is where you can find additional settlement costs.

Section 1400 — The total costs to close — this number also appears on lines 103 and 502 on the first page.

Page Three

The third page of the new HUD-1 is partially a confirmation that the costs outlined in the Good Faith Estimate are what you’re actually paying — or pretty close.

Some quoted costs on the GFE cannot be changed, some can be changed as much as 10 percent and some can simply change with the winds.

Also shown on page three is a recap of your loan including the mortgage amount, interest rate, loan term, ARM-related terms (if any), prepayment penalties (if any), balloon payments built into the loan (if any) and related matters.

IMPORTANT: Always keep your closing papers in a safe place for tax reasons and to assure that your loan terms are actually the same as disclosed on the HUD-1. For questions regarding closing issues, speak with your real estate broker, mortgage lender and closing agent. Be aware that some costs found on a HUD-1 may be tax deductible — for specifics speak with a tax professional.

How To Read The HUD-1 is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Mortgage insurance companies have a big stake in bad times because when insured borrowers fail it’s the MI companies that can face big claims. The good news is that to date the MI companies have paid all claims and have actually increased loss reserves.

Big Reserves

The MI companies are in good shape because they’re state-regulated. Under state rules mortgage insurance firms must set aside 50 percent of all premium dollars in a contingency fund for 10 years. They must also add to loss reserves whenever there’s a delinquency.

Because piggyback loans were largely designed to avoid mortgage insurance coverage, the MI companies generally evaded the liability associated with such financing. However, they have covered millions of conventional mortgages and in an environment with tough times and rising unemployment levels it follows that they face big claims.

Claim Advances

Borrowers and mortgage insurers are allies in the fight against foreclosure — borrowers don’t want to lose their homes and MI companies want to hold down claims. To help borrowers, MI companies sometimes will offer a claim advance, money paid to a lender to help borrowers get past a rough financial patch.

Why would MI companies offer such help? First, because it is less expensive to advance some cash are perhaps avoid foreclosure than to lose a home. Second, because any money paid with a claim advance reduces any money which might be owed to a lender when a home is foreclosed.

Second Look Program

The Mortgage Insurance Companies of America (MICA), the national association which represents the MI industry, has now launched a “second look” program. In basic terms the idea is to alert the public that in some cases — but not all — MI companies may be able to assist distressed borrowers.

Under the Second Look program, MI companies see if it’s possible to “give borrowers an additional underwriting review if they have been turned down for a loan modification of a non-GSE mortgage.”

“The new program,” says MICA, “is designed to be used on any non-GSE loan modification where a so-called “net present value” (NPV) test is used to determine eligibility. These could include jumbo mortgages, loans on investors’ balance sheets and loans that were packaged into private-label mortgage securities.”

The Bottom Line: If you face the loss of your home, please follow the steps outlined in our free mortgage modification guide. If you cannot make any progress with your lender, then you or your attorney should contact your MI company immediately.

Can You Avoid Foreclosure With A “Second Look”? is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Answer: When you bought your home you purchased with little money up front, perhaps 3.5 percent down. This means a lender put up as much as 96.5 percent of the purchase price. This is a high-risk situation for lenders because they greatly prefer 20 percent down.

With FHA, what you have is not a loan from the government but a form of insurance for the lender. You can borrow with little down, but you have to pay for the insurance coverage – the MIP.

There are two ways to end FHA MIP payments. You could refinance with a new loan – this would end the MIP payment but only makes sense if you have at least 20 percent equity so that the new loan does not require either the FHA MIP cost or private mortgage insurance (MI).

Or, you can reduce the loan balance to 78 percent of the original principal amount.

Specifically, here’s what HUD has to say:

“In the past, some FHA borrowers have paid annual mortgage insurance premiums throughout the life of their mortgages. Effective for all loans closed on or after January 1, 2001, FHA’s annual mortgage insurance premiums will be automatically canceled under the following conditions:

“For mortgages with terms more than 15 years, the annual mortgage insurance premiums will be canceled when the loan to value ratio reaches 78 percent, provided the mortgagor has paid the annual mortgage insurance premiums for at least five years.

“For mortgages with terms 15 years and less and with loan to value ratios 90 percent and greater, the annual mortgage insurance premiums will be canceled when the loan to value ratio reaches 78 percent, irrespective of the length of time the mortgagor has paid the annual mortgage premiums.

“Mortgages with terms 15 years and less and with loan to value ratios of 89.99 percent and less will not be charged annual mortgage insurance premiums.”

For details, speak with current and prospective lenders.

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Syndicated originally by Content That Works and posted with permission.

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The HUD numbers are important because the FHA is generally said to insure about 90 percent of all reverse mortgages, or what HUD calls “HECMs” — Home Equity Conversion Mortgages.

HUD’s insurance pays off borrowers if a lender cannot come up with promised dollars and it also protects lenders if a property sale results in a loss. The cost for such insurance, says HUD, is 2 percent of the home’s value up-front plus one-half percent on the loan balance each year. Notice that fee is 2 percent of the home’s value, not 2 percent of the loan amount, a sum that could be much smaller than the value of the property.

In an interview with me, Meg Burns, director of the Federal Housing Administration’s Single Family Program Development, said that roughly 375,000 reverse mortgages have been issued since the program began. In that time there have been between 5,000 to 6,000 “assignment claims” from lenders. Under HUD’s plan, lenders can make a claim when a loan has reached 98 percent of its maximum claim amount but is not yet due and payable. Of these assignment claims, only 109 resulted in losses to the FHA. Another 1,500 reverse loans simply went sour. Burns says there have been no “demand claims” from borrowers as a result of lenders who have not fulfilled reverse mortgage obligations.

In total then, HUD had 1,609 claims within a program that has insured some 375,000 loans at the time we spoke with Burns The typical claim, she said, we about $18,000.

That sure sounds like a lot of insurance and relatively few claims. In comparison, the Government Accountability Office reports that “property-casualty insurers’ losses and loss adjustment expenses accounted for approximately 73 percent of written premiums in 2005.”

So is HUD milking a cash cow from senior insurance premiums?

The reverse mortgage program has only seen significant growth in the past few years. This means most potential claims lie ahead. Pay-outs to date have come from a relatively small number of loans, loans made while home values have generally been rising. In effect, insurance claims to date may not resemble claim rates in the future.

HUD has been smart to maximize premiums until real loss levels are better understood. That said, once HUD has more experience with reverse mortgages it will then be appropriate to re-visit premium levels to see if borrower costs can be reduced.

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Published originally by Realty Times on January 23, 2008 and posted with permission.

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But the turn of the calendar is also a good time to do something in real estate that has become increasingly important: Check your insurance coverage.

I bring this up not only because we have recently seen various hurricanes, floods, tornadoes, fires, windstorms, earthquakes and other tribulations of historic proportions, but also because the nature of homeowners insurance is changing.

To start, it’s perfectly plain that homeowners insurance is something one never uses except in a dire and substantially-expensive emergency. Small claims are foolish — they can lead to higher rates and outright cancellations.

Since small claims are hazardous to your coverage, it makes sense to increase your deductible. Instead of $500 go to $1,000 or more. After all, you’re not going to jeopardize coverage over $500 so why have such a small deductible? A higher deductible will reduce premium costs and that’s a good way to start the New Year.

It also makes sense to speak with your insurance broker every so often — and now is the time. You want to know about the status of your policy (whether it’s in force), whether coverage should be tweaked in light of changing home valuations and if any new coverage is required.

You want to ask questions because your mortgage lender requires that you have fire, theft and liability coverage. To make sure this requirement is being met lenders carefully check insurance policies.

Unfortunately, paperwork is sometimes botched and needs to be clarified. If there is a lapse in your coverage, or if there is thought to be a lapse, you are likely to get a letter from your lender demanding proof that you actually have coverage. If you do not have coverage, the loan can be called.

For those with rental properties the situation is both similar and different. The cost to insure a rental unit is less than the expense to cover a residence of equal value. The reason for the lower insurance cost is that the rental-unit policy provides less owner coverage.

What’s not covered in a rental-unit policy for property owners is the stuff owned by tenants and some of their liability. This is not a gap that should be re-assuring to anyone: Owners should make certain that tenants have renter’s insurance so that if tenant goods are damaged or there is an insurable claim against them the tenants will have coverage. Also, if there is a problem and tenant furnishings or other property is destroyed, potential claims against an owner will be held to a minimum since the tenant already has coverage.

To protect themselves — and their tenants — owners should insist as a condition of the lease that tenants get renter’s insurance. This is fair, after all if the mortgage company can require insurance from borrowers to protect the value of the loan’s underlying security (the house), landlords can also shift costs and require that tenants get appropriate coverage.

Renter’s insurance tends to be inexpensive, all the more reason to require it. Moreover, such coverage can be enormously valuable.

A number of years ago a tenant cooking breakfast somehow set a kitchen on fire. It was an accident, such things happen and it is why one has insurance. What wasn’t burned was soaked by the fire department and holes were made in the walls to check for hidden fire and smoke. The cost to repair the damage was well into five figures.

The house was filled with smoke detectors so no one was hurt. But still, there was the matter of paying for the damage.

The way it worked was that owner’s policy paid for the repairs, the renter’s insurance paid the owner’s insurance company and the tenant paid the deductible. While an unwanted fire is never a good thing, in this case everyone’s damages were held to a minimum, in large measure because both the owner and the tenant had proper insurance. Years later the tenant is still at the property.

So pick-up that phone and dial your insurance broker. A little chat once a year can be very re-assuring.

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Published originally by Realty Times on December 27, 2005 and posted with permission.

Is Your Home Insurance Up To Par? is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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In addition to answering your questions, some insurance companies interpret such inquiries as a “claim” to be reported to insurance rating bureaus — and “claims” are the very things which result in higher rates, less coverage and sometimes no coverage.

“Premiums were being raised and coverage was being denied simply because consumers were being responsible enough to inquire about the specifics of their homeowner’s policy,” explains California Assemblyman Ron Calderon (D-Montebello).

“According to consumers who have complained,” he continued, “some of the ‘claims’ in these databases were merely inquires that were treated as claims without the knowledge of the consumer. As a result of this practice, it has become more difficult, and in some cases, prohibitive for current and prospective homeowners to purchase homeowners’ insurance.”

This is not a minor issue for homeowners. If you have a mortgage your lender requires that you have adequate insurance coverage for the property. Why? Because the property is the lender’s security if you fail to repay the loan.

You will notice that the questions raised by curious consumers did not cost the insurance companies a dime. No money was sought and no damage was reported. There was no loss, no injury, or harm of any type. Instead, what we have are consumers doing what consumers are told to do: See if their insurance coverage is adequate and up-to-date, perhaps compare coverage and prices with other insurance carriers.

Comparison shopping is a useful exercise and questions such as the ones posed above should be encouraged. It’s hard to imagine any circumstances under which more information regarding insurance coverage is or should be an underwriting minus — all of which brings us back to California.

In late September 2003, California passed AB 1049, a law sponsored by Calderon which generally prohibits any insurance institution or agent from making an “adverse underwriting decision in whole or in part” simply because “an individual has previously inquired and received information about the scope or nature of coverage under a residential fire or property insurance policy” and the “inquiry did not result in the filing of a claim.”

In other words, an insurance company — at least in California — cannot see you as more risky merely because you ask about coverage.

The bill in its final form had no formal opposition. Official supporters included the California Department of Insurance, the Foundation for Taxpayer and Consumer’s Rights, California Consumers’ Union, Coalition of California Insurance Professionals, Nationwide Insurance Enterprise, Liberty Mutual Group, Western Insurance Agents Association, and the California Association of Realtors.

You have to wonder why other states have not adopted similar legislation. Exactly who objects? What is unfair or unreasonable about the new California law? The Calderon legislation is the kind of consumer protection that ought to be enacted in every state because no homeowner should be penalized for asking about their insurance policy or coverage.

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Published originally by Realty Times on October 7, 2003 and posted with permission.

California Law Ends Insurance Abuse is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Welcome to the new era of homeowner insurance, a time when insurance companies are trying to limit claims, increase exclusions and raise premiums — all with some reason.

According to the Insurance Information Institute premiums are increasing: Average policy costs for homeowners rose 4.8 percent in 2005 and such price hikes are unlikely to be finished — just look at hurricanes Gustav and Ike as well as declining investment revenues.

There isn’t much homeowners can do about declining stock values, but there are ways to get the best possible rates and coverage at the least cost.

Get Enough Coverage

You want sufficient coverage to replace the property in the event of disaster, but how much is enough can be tricky. For instance, new building codes may require different systems and standards than those in place when the property was constructed.

Alternatively, you don’t want too much coverage. For example, it’s usually held that land is not insurable because it cannot be damaged — if a house burns down the property is still there. The bottom line is that you want enough coverage so that improvements on the property can be replaced at today’s prices and with today’s technologies.

Beware of Inflation

Inflation reduces the spending power of cash. Many insurance policies have an “inflation guard” feature so that coverage automatically increases each year with the rate of inflation. However, given that local home prices often rise more than the rate of inflation, it’s wise to check policy coverage at least annually.

Don’t Push The Limits

It’s a common practice for drivers not to make small claims for auto insurance when they have a minor ding or dent. The same theory may well apply to insurance: even small claims require paperwork and payments. Think of insurance as disaster relief and avoid small claims.

Use Care In The Animal Kingdom

Several years ago while at the pound with the children looking for a dog we spotted an especially large, robust creature which, said the cage notice, “eats livestock.” Insurance companies, fairly or unfairly, are backing away from coverage which involves certain species and breeds. You can pretty much figure that any animal which is poisonous, endangered, illegal to import (think of certain parrots), huge, dangerous or capable of downing a heifer will raise coverage questions.

Prepare For Disaster Repairs

It routinely happens that after a hurricane, earthquake or other local disaster repair costs rise substantially above going rates. One solution is something called “extended replacement cost coverage” which will increase allowable repair payments by as much as 20 percent.

Personal Stuff

Homeowners insurance not only provides protection in the case of fire and theft, but also the loss of personal goods. Coverage often equals 50 percent or more of the policy’s face value, but there are cautions when it comes to personal goods. In one case, a home dated back to the 1700s — and so did the furnishings. The tables, chairs, art and other items were worth substantially more than the home, a serious insurance issue since such items cannot be replaced.

Is the policy’s personal property coverage sufficient? If you have art, jewelry, historic items, expensive furnishings, etc. then check with your insurance broker to obtain full and complete coverage. Ask about “cash value” coverage and “replacement cost” policies as well as special coverage for high-priced items — so-called “floaters” or “endorsements.”

How do you appraise items with sentimental value? What’s invaluable to you may not have much cash value for insurance purposes.

How do you know what’s covered? It’s a good idea to make a video record of each room in the house, collections, silverware, art, and other valued items. Place the video in a safety deposit box. In the event of a claim you then have a visual record and inventory.

What About Tenants?

In the same way that you need property insurance for your home you also need it for rental properties. As a condition of the lease many landlords require tenants to obtain renter’s coverage. If there’s a problem at the property, the tenant then has insurance protection — and less reason to make a claim against the property owner.

In a similar manner, ask insurance brokers about coverage if you have a boarder. Can you get liability coverage? Are you protected if the rent stops because of a disaster?

Living Expenses

If you do have a fire or other disaster you still have to live somewhere. Does your policy pay for living expenses after a catastrophe? If yes, how much?

Liability Coverage

If someone trips and falls in your front yard — or claims they did — you may well face a court suit. The good news is that homeowners coverage provides liability protection. Specifics regarding coverage and legal fees can vary, however, and you may want additional coverage.

Surprising Goodies

Have a home office? Protection may be included in your policy — but it may be limited in which case an additional endorsement can be desirable. Have a child in college? See if your policy covers lost or stolen property for college students living in dorms. Do clients and customers visit your home-based business? If yes, check about coverage.

Premium Payments

When homes are financed lenders often take on the duty of collecting monthly insurance costs, holding them in “escrow” or trust accounts, and then paying your policy as bills come due. This is fine, but it makes sense to check annual mortgage account statements to assure that such payments have been made — otherwise you may not have coverage.

As always, it pays to sit down with your insurance broker to specifically find out what’s covered, what isn’t, what can be covered better and where costs can be reduced.

(Pictured: Nemo, a golden retriever, 100 pounds of friendly dog.)

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Published originally by Realty Times on March 18, 2003 and posted with permission.

“Canine Redlining” And Other Issues Impacting Homeowners Insurance is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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