Have you ever wondered how your insurance rates and coverage could possibly affect your ability to secure a home loan?
When you apply for a mortgage, the loan officer is looking to find you funding via a bank. The bank in turn, wants to calculate how big of a monthly payment you can afford given your income, debts, liquid down payment available and your credit score. Then, they establish how much they are willing to lend you. This gives you a price range and a budget when looking for a home.
BUT, those aren’t the only elements that affect your monthly mortgage payment. Yearly state property taxes and your insurance premium also need to be considered. One of those key elements is your insurance rate. The vast majority of homebuyers have an escrow account. This account is used to pay for things like the closing costs, insurance and taxes. The escrow account pays the insurance company the yearly premium for insurance and pays the state of Arizona for your tax obligation for the year. Then, you essentially pay back the escrow via each monthly mortgage payment.
So, every time you make your mortgage payment each month, you are paying your insurance and taxes for the month as well. All rolled into one easy payment! Therefore, when applying for a loan it is essential that you sit down with your agent or broker and find the best price possible for your insurance protection. This price broken down monthly is going to be a part of your future mortgage payment, and if it is too high, that might push your potential monthly mortgage payment beyond what the bank feels comfortable lending you.
I have encountered many occasions where the insurance costs were a linchpin for a loan being denied or accepted. The bank not only wants to make sure the price fits in your payment, they also want to ensure that the policy itself contains ample protection to cover their risk in the event of a loss. Since they are the co-owners of the home until you pay it off, they want to make sure they are indemnified if your new home is physically destroyed or damaged.
You want to coordinate with your insurance agent to make sure the home insurance policy contains the following:
- Replacement Cost Coverage – meaning the company does not factor in depreciation when paying you for a claim or physical damage to your home. They pay the cost to replace new straight up.
- Expanded Replacement Cost– In the event of a total loss, most preferred insurance companies will give you a cushion or an expansion on the original insured amount of the home to ensure there is no shortfall in rebuilding funds at the time of loss.
- Manageable Deductibles—Lenders are wary of extremely high deductibles. They worry that if there is a loss, you could not come up with your deductible funds to file a claim. A deductible is your share of a loss in any insurance policy. This amount has to be paid before the insurance company pays the remainder of the claim.
For instance, if your home is damaged to the tune of $40K, and your deductible is $1K, then you pay the first $1000, and the insurance company pays the remaining $39,000. If the deductible is too high for you to afford in a pinch, this could be a point of contention with your lending bank. The deductible also has a big effect on your insurance rate. The higher your deductible, the lower you pay for the yearly premium. The lower the deductible, the more you pay per year in premium. Therein lies the need to consult with your insurance professional to review different company’s offerings in order to find a happy medium.
There are other elements that are important to you, the owner. Do you have ample liability protection in the event that someone gets hurt at the new home or sues you based on something that happens there? Pools are very popular in Arizona. For clients that have a pool, I always recommend at least $500K in liability lawsuit protection, and $5K medical protection. Typical home insurance companies carry a standard $300K liability and $1K guest medical protection. Always speak with your agent to review potential hazards on your property that may require more liability insulation.
Overall, buying a home is a dream for most all of us. It is very achievable, and the process can be much easier and less stressful if you involve your insurance agent. Ideally, you find an insurance agent that coordinates with your loan officer and realtor as a team, so that everyone is on the same page and working toward a common goal of getting you into your dream home. This open communication helps you maximize your buying power, shorten your closing time, and keep your sanity!
Guest Blog written by Simmons C Wyche Liberty Mutual Insurance firstname.lastname@example.org (602) 481-2165 libertymutual.com