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Insurance & Mortgages; What Is Required? What’s It For?

sunny-house-treeesThere is often confusion in regard to all of the insurance that borrowers either should have, or are required to have, when they finance a home.

Here is a brief outline that will hopefully alleviate some of the confusion.

I. Fire, Hazard, or Homeowner’s Insurance. These terms are used interchangeably even though they are not always the same thing. Homeowner’s insurance is the more proper and broader term, and it covers losses and damages to a property and the assets within it, e.g. fire, theft, vandalism, weather damage, etc. Lenders require proof of homeowner’s insurance before they will issue a mortgage b/c they want to make sure their collateral can be rebuilt or repaired in the event of a loss.

II. Private Mortgage Insurance (PMI) or Mortgage Insurance (MI). This is insurance that covers the mortgage only if the borrower cannot make payments, and it is usually required when loan-to-value ratios for a single loan exceed 80%. MI is associated with FHA or government loans, and PMI is associated with conventional, non-government, loans. I explained PMI in more detail here.

III. Flood Insurance. Lenders require flood insurance whenever a property is located in a high-risk flood zone, as designated by FEMA (Federal Emergency Management Agency). In high-risk areas, flood insurance can be very expensive – several hundred dollars per month. We have seen people successfully appeal flood zone designations with the use of elevation maps and consultants, just as an FYI.

IV. Earthquake Insurance. This of course covers damage to a dwelling in the event of an earthquake, a definite risk in CA. Despite that risk, we rarely remove (to ever) see it required by lenders. The exception would be when the property is on a high-risk fault-line that is illuminated by an appraiser or property inspector.

V. HO6, Walls-In, or Content Insurance. These terms are interchangeable, and they represent the insurance that lenders require condo buyers to purchase in lieu of regular homeowner’s insurance. Homeowners association dues always cover structural insurance, but they often do not cover the contents within a condominium. H06 insurance is relatively inexpensive ($35 to $45 per month) in most cases.

VI. Lender’s or ALTA Title Insurance. Lenders always require this b/c it ensures that the title is “clear” and that there are no other lenders or lien holders making claims in front of the lender’s claim (the mortgage or deed of trust).

VII. Owner’s or CLTA Title Insurance. This is optional, and ensures that there are no other entities or people making claims to the title of a particular property. Owner’s policies are often very inexpensive (a few hundred dollars) when they are bundled with the required Lender’s policy, so we always recommend them as cheap and prudent insurance.

VIII. California Fair Plan. This is insurance of the last resort when standard homeowner’s insurance is not available b/c a property is deemed too high of a risk, e.g. very high fire risk, too many claims in the area, issues within the property. This insurance is expensive and the reviews are not particularly good, but it is invaluable when there are no other options.

Jay Voorhees
Founder/Broker | JVM Lending
(925) 855-4491 | DRE# 01524255, NMLS# 335646