Homeowners Insurance: What to Expect When Purchasing & Financing a Home

 Homeowners Insurance:  What to Expect 

When Purchasing & Financing a Home

There are a lot of moving parts to know about and consider when purchasing a home and applying for a mortgage.  There's the mortgage application itself, the requests for information and documentation, the processing and underwriting, seeking the loan approval, and finally closing.  

No doubt, it's a lot for buyers to digest at once.  So it should come as no surprise that borrowers have a boatload of questions to ask along the way.

One of the questions I hear most commonly surrounds the topic of mortgage closing costs ... most specifically those pertaining to Homeowners Insurance.   Many of my borrowers ask ... 

"Why must I pay a full year of a Homeowner policy at the time of Closing?"  

The topic of Homeowner Insurance is especially confusing for those borrowers that, moving forward, will have an insurance escrow payment as part of their new monthly mortgage payment.  The short answer to the question is rather simple ... it's mandatory.

The more complete answer is that Mortgage Lenders require that one full year of coverage is in place from the time of issuance (typically the Closing/Escrow date).  That guarantees them that they have insurance protection for the interest and investment they will hold in the property.  

A "Mortgagee Clause" naming the specific Lender providing the mortgage is required on the Homeowner Insurance policy.  This mortgagee provision grants special coverage and protections to the mortgagee (Lender).  

Those are: 

• That if there is a loss or damage to the property, the Mortgagee (Lender) will be paid/reimbursed for that loss/damage
• That if the policy is to be canceled, the Mortgagee (Lender) will receive advance notice
• That the coverage is continuous, even if the insured damages the property via some intentional act 
• That the Mortgagee can transfer/sell their rights to another Lender on the secondary market, if they choose (The acronym ISAOA is used, meaning "Its successors and/or assigns")

Now, it's true that most home buyers/borrowers choose to have their monthly insurance costs (insurance escrow) included in their mortgage payment.  But again, many of my borrowers ask me "Why this monthly escrow payment is deemed insufficient and will not meet the needs of the Lender?" 

First, it's important to know how a Homeowner Insurance policy is paid ...  

Homeowner Insurance is typically paid once a year, at the policy's renewal time.  The renewal date normally coincides with the anniversary of the mortgage Closing date or "initial activation" of the insurance policy.  

Further, when you Close on your home loan, you skip a month and then make your first monthly mortgage payment the following month.

Here's an Example:  

1. Close on your Mortgage in November 
2. No monthly payment due in December
3. 1st monthly mortgage payment is due in January

However, this means that a borrower would be shy one insurance escrow monthly payment at the end of their first year.  Only 11 monthly mortgage and escrow payments will have been collected.  

Most Mortgage Servicers pay the annual insurance premium due in advance of the actual due date (sometimes up to 4 to 6 weeks early) so that there is no lapse in insurance coverage.  That means there is a great likelihood that the escrow account would not have accumulated the required monies needed to make full payment at that point in the year, especially if the Insurance premium gets paid before the Borrower's monthly payment is made.

Mortgage Servicers have been provided a right given them in the Mortgage Escrow Provision Act (called Illinois Mortgage Escrow Act within the State of IL) to maintain a (2) two- month cushion of monthly escrow items (including insurance).  This allows for any annual changes (increases typically) in costs for real estate taxes and (HOI), Homeowner Insurance.

So what does this all mean for the borrower?  

It means that as much as 16 months and no less than 14 months of Homeowner Insurance will be "collected" or due at their time of Closing.  Of that money collected, a full year (equal to 12 months of escrow) immediately goes to the insurance company as payment to initiate the Homeowner Policy.  The remaining 2 to 4 months of collected money goes into their mortgage escrow account.

The escrow account is managed by the Mortgage Loan Servicer.  Escrow monies are held in reserve.  Subsequent monthly escrow payments are added to this reserve each month when the borrower makes their monthly mortgage payment.  The cycle renews itself each year on the insurance policy renewal date.

For those refinancing a mortgage with a Homeowner Insurance escrow in place, this process takes on a bit of a different look ...  

Much depends on the Homeowner Insurance Policy renewal date and the date of the new loan's Closing and subsequent first payment date.  I'll address the process for Refinance Escrows more thoroughly in an upcoming post.

Anyone considering a home purchase, or presently doing so, should consult with their loan officer as to the specifics and coverage needed within their own Homeowner Insurance Policy.  Once that information is secured, the search for a policy should begin.  That way the policy will be ready and in place at the time of your upcoming Mortgage Closing.

Should you have questions, reach out ...

* Are you dreaming of buying or refinancing a home or Investment Property in New Lenox - Will County - Chicagoland ... IL or WI?


Contact me today! I'll put my 40 years of mortgage experience and expertise to work on your behalf. I'm easily found at:

Gene Mundt

Mortgage Originator - NMLS #216987 - IL Lic. 031.0006220 - WI #216987

American Portfolio Mortgage Corp

NMLS #175656

Direct: 815.524.2280

Cell: 708.921.6331

eFax: 815.524.2281

gmundt@goapmc.com

www.genemundt.com

  

             

   

 

  

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