Tag Archives: lender

Insurance – What You Need To Know

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Before finalizing a mortgage, lenders will require buyers to purchase a minimal level of “hazard insurance.” Hazard insurance covers damage or destruction by fire, smoke, theft, vandalism or other similar events of loss. To protect your own interest as the buyer, you will want to investigate a more comprehensive homeowner’s insurance that includes liability and a higher level of hazard coverage above the lender’s requirements.

Homeowner’s Insurance Coverage

Typically, the hazard portion of the homeowner’s insurance policy covers the house itself, furnishings and personal items within the home and any other structures on the property like the pool or detached garage/pool houses. Most standard policies won’t protect again damage caused natural disasters so you’ll want to purchase additional insurance if your home is in a high-risk area for fire, floods, earthquakes and more. Also, if you have expensive art or jewelry in the house, you need to consider having them additionally insured.

The homeowner’s insurance policy also covers some types of personal liability if someone should sustain injury on your property. If your cousin Millie trips on a loose floorboard in your home, the policy will pay for medical expenses and other losses up to a certain amount. Again, this portion isn’t required by your lender, but it’s a good idea to safeguard your interest.

Insurance Due Diligence

As soon as escrow opens on the house you are about to buy, your real estate agent should set you forth on shopping for an insurance policy. Chances are, your agent will have strong relationships with several insurance agents that he/she can refer you to. If you are a long standing client with a company for other types of insurance such as car or life insurance, it would be beneficial to investigate a homeowner’s policy with that company for added discounts and perks.

Finding good and cost-effective homeowner’s insurance has become increasingly difficult in California due to high payouts for mold, fire and other disasters. If the house that you are looking to buy has a history of water damage (precursor to mold) or have issues that may make it difficult for you to obtain insurance on it, you might want to consider incorporating an insurance contingency into the purchase agreement.

Insurance Do’s

Here are a few things to keep in mind when looking for a homeowner’s policy:

1)   Know your home’s value – Establish your home’s replacement cost with a local builder.

2)   Shop around – Insurance companies differ and therefore can offer you different coverage at different pricing. Shopping around could save you money.

3)   Investigate the company beyond pricing – Some companies take a long time to service claims. If you are in a situation where you have to file a claim, it’s better to have a solidly-backed company with a great reputation on your side.

4)   Study the policy’s coverage – Make sure everything that you want protected is covered and covered sufficiently in the policy. Don’t assume that “personal property” includes every exceptional item you own. Find out how to get coverage for the things you really care about.

5)   Ask for discounts – Insurers can get creative with their fees so always ask to see if you qualify for any discounts

6)   Avoid making small claims – A history of claim-making will make you a “riskier” client and prevent you from securing a favorable policy.

7)   Review your policy annually – Keep your policy updated so that the coverage is appropriate and adequate for current value.

As with most components of lending and escrow, insurance vetting can be tedious. In shopping around, you will find that it’s difficult to compare apples to apples with policies. Make sure you understand each proposed policy and that the coverage is adequate for your needs. As always, your real estate agent should be assisting you through the process of obtaining appropriate insurance for the property you are about to buy.

Appraisals – Part II

Appraisal Report

After a few rounds of counter offers and negotiations, buyer and seller agree on a price and the home goes into escrow. Time to celebrate? No, not just yet unfortunately. Within the escrow process, there are several hurdles to overcome, one of which is the appraisal. As we mentioned in last week’s post, appraisals are a critical component of the lending process. A low appraisal can derail the agreement reached by the buyer and seller.

Low appraisals can arise in a declining housing market due to the lack of recent comparable homes sales, making it difficult for appraisers to determine the current market value of a property. When home sales slow, good comps “age” fast. Comps of homes that sold over six months earlier generally become obsolete data and aren’t factored in the valuation. Add foreclosures and short sales to the equation and appraisal values can vary greatly depending on the appraiser’s methodology. But, low appraisals can also occur when the market is rising rapidly as appraisers may have a hard time adjusting their valuations to account for escalating market value.

The reality is that appraisals are conducted by independent 3rd parties hired by the buyer’s lender. Legislation requires lenders to use an intermediary entity who then in turn selects the appraiser, ensuring that the lender and the appraiser have no conflict of interests. The regulatory intent is to have the appraisal be as impartial as possible. So it’s not at all possible for the buyer or the seller to choose who performs the appraisal. However, if you have a knowledgeable and seasoned real estate agent representing you, he or she can be instrumental to the process. Here’s how:

  • Your real estate agent would never want his/her client to overpay for a house so chances are, during the negotiations process, he/she will be facilitating the negotiations towards fair market value, already mitigating the chances of a low appraisal report.
  • Your real estate agent presumably is an area specialist so he/she should be well-studied in the specific neighborhood of the home so that he/she might drawn upon nuanced knowledge of schools, community and other neighborhood desirability details that can be shared with the appraiser.
  • All reputable real estate agents will attend the appraisal at the home and provide a package of most relevant comps to the appraiser.
  • In addition, the agent could have knowledge of off-market home sales in the area that can impact the appraisal or conversely have knowledge of recent foreclosures and short sales that should be exempt from the valuation.

Good agents are keen to the fact that appraisers tend to draw their comps straight from the MLS but that data collected may not represent the clearest picture of market activity and value.

And should the appraisal return a lower value than the negotiated sales price despite the diligent efforts of your agent, here are the buyer’s options:

  • Negotiate a new price – sellers may entertain a lower sales price as a low appraisal is a blemish on their home should they have to put the house back on the market, or there could be other circumstances at play like the purchase of the next home contingent of the close of the current home that might increase seller flexibility.
  • Put more money down – if feasible, buyers can always bridge the difference between the loanable amount with cash.
  • Hire a new lender – a new lending entity will restart the process potentially with a new appraiser.
  • Cancel contract – contracts are typically written with an appraisal contingency to protect the buyers from having to follow through on the heels of a low appraisal.

Under any of the circumstances above, the thing to avoid while navigating the pitfalls of a low appraisal is letting the appraisal contingency period expire or else the buyer is locked into the transaction.  Again, your real estate agent should be well aware of the contingency period and would never allow the period to expire.  A seller benefits from a mutual resolution so typically they will grant an extension while the buyer vets all options.

Whether you are the buyer or the seller in a low appraisal situation, your seasoned real estate agent should be guiding you through the entire process and see you through its resolution.

Boosting Your Credit

 

Credit report on a digital tablet

Several blog posts ago, we covered what you ought to do in anticipation of an imminent home purchase.  One of the “must do’s” was to check your credit as your credit score is a critical factor a lender considers in their underwriting process that goes into determining the details of your loan package.

For that reason, it’s incredibly relevant for you to check your credit report and score with the three credit bureaus: Experian, TransUnion and Equifax. Each bureau will yield different credit scores so it’s pertinent to cover all three.  Upon receipt of your reports and scores, carefully review them and see if there are ways to improve your credit profile as often times the reports will include incorrect information and errors.

Boost Your Credit Score

Here are a couple of actionable steps to take that can boost your score over time:

1)   Pay your bills on time and in full when possible.

2)   Don’t open new lines of credit.

3)   Try to reduce your credit card debt to 25% or less of your credit line on each card.

4)   Don’t close your credit card accounts because then you’ll be using more of your overall credit limit.

5)   If you have an old credit card that you haven’t used in awhile, use it and then pay the bill in full to show that you can responsibly handle credit.

6)   Bring your over-the-limit and past-due accounts up-to-date.

7)   If you have any collections or judgments against you, pay them off as quickly as possible.

A reputable lender can suggest specific actions on how to deal with errors in reporting so it’s smart to develop a relationship with a lender early in the home buying process.  Additionally, lenders can tell you what minimum credit score is required for a particular loan program.

While lenders look at many factors when evaluating you for a mortgage loan, including your debt-to-income ratio, your income and assets, how much your down payment will be and your job history, your credit score is a vital determinant toward a favorable loan package.  Therefore improving your credit profile is clearly in your best interest during the months before beginning a serious home search.