What Type of Insurance Do I Need When I Buy a Home?

Question: What type of insurance will I need to purchase once I buy a new home? I am currently renting and have renter’s insurance at a low monthly rate, but was wondering if there is a similar type of insurance for when I own. I also hear that I need mortgage insurance, and am not sure what that means. Thanks for your advice!

Answer: When you purchase a home, you should be aware of several different types of insurance and you may need to purchase each depending on the type of home you buy. They include: 1) Homeowner’s insurance 2) Mortgage insurance and 3) Title insurance.

Since you are currently renting, you’re familiar with renter’s insurance, which covers issues arising from theft, fire, or personal liability within your leased apartment. With your new home, you will purchase a similar policy except it will be called homeowner’s insurance. Typically, homeowner’s insurance is not very expensive, it’s required by your mortgage lender, and it’s well worth the price and peace of mind. Your monthly or yearly premium will cover your home against theft, flood, fire, natural disasters, etc. It will also provide you coverage in case somebody slips and falls on your property and sues you.

Mortgage insurance (often abbreviated as PMI — private mortgage insurance) may be necessary if you are buying a home with less than a 20 percent down payment. Mortgage insurance protects the lender against a default (non-payment) by the borrower (you). Once you’ve paid down the principal on your mortgage or your property has appreciated so that you have 20 percent equity in your home, you will no longer need to maintain the mortgage insurance. Additionally, there are certain ways to avoid having to pay this type of insurance, including taking out more than one mortgage or a home equity loan to cover a portion of the down payment.

The third type of insurance is title insurance. This protects you from claims against the title to your new home from previous owners or third parties claiming to have a right to the property. These issues can arise if your home was previously transferred fraudulently, there were liens that were unpaid, encroachments on the land, etc. Title insurance is a one-time charge (no ongoing premiums) that is paid at settlement. There’s lender’s title insurance (mandatory) and owner’s title insurance (optional).

Reverse mortgages shift gears

Now, a new program made possible by federal legislation passed last year to address the foreclosure-driven housing crisis is also helping seniors use a reverse mortgage to help buy a home, provided they can come up with a large down payment. Before the Home Equity Conversion for Purchase program rolled out in January, seniors 62 years and older could only use reverse mortgage loans to draw out tax-free payments from the equity held in an existing home while continuing to live in it.

Many lenders are starting to offer these new loans in addition to traditional reverse mortgage products. But as withtraditional reverse mortgages, there are costs involved that can add thousands of dollars to the loan amount, which grows over time and has to be repaid after the last borrower leaves or sells the property or dies and the home is passed on to heirs.

"We had not been able to offer that option to seniors before," said Joseph DeMarkey, regional director for MetLife Bank, which provided the loan for the couple. "It's still the same underlying product that's been around for 21 years. It just allows people to use it for purchase finance as opposed to a refinancing tool."

Program participants are required to make a down payment typically ranging from 30 to 40 percent. The reverse mortgage loan amount is used to pay off the balance of the new home's purchase price. (see breakout for example of how it works).

People who have a traditional reverse mortgage on an existing home cannot refinance it into a reverse mortgage for purchase to buy a new home. Instead, the reverse mortgage on the existing home would have to be paid off before applying for the reverse mortgage for purchase.

The reverse mortgage for purchase program requires that the new home be the primary home, which means living it in for a least six months of the year. The home can be located anywhere in the United States.

"The home you are moving out of is irrelevant in regards to the new one. We are seeing folks who become snowbirds and are going to live in Florida for seven months of the year," said Eric Bachman, founder and chief executive officer of Golden Gateway Financial, an Oakland-based reverse mortgage broker that started offering the new loans earlier this year.

Borrowers never have to make a mortgage payment as long as they live in the primary home. Unlike with traditional reverse mortgages that require seniors to be homeowners, renters are not excluded from the new program. And if you already own a home, there is no requirement to sell it. In fact, you could rent it out, which is what Tubbs and Majid are doing with their Moraga home while waiting for the real estate market to improve before selling it.

Before taking out a reverse mortgage for purchase loan, borrowers are required to receive counseling from a nonprofit agency approved by the Department of Housing and Urban Development.

"It's a new way to use a reverse mortgage. It's catching on pretty fast," said Tricia Smith of San Mateo-based HIP Housing, an HUD-approved loan counseling agency in San Mateo.

While it may be the right move for some people, borrowers need to be aware of closing costs, fees and Federal Housing Administration mortgage insurance premiums that can add thousands of dollars to the cost of the loan, she said. Typically, those extras are financed in the loan amount.

The loan amount available to borrowers is tied to a percentage of the current reverse mortgage $625,500 lending limit or appraised value of the purchased home, whichever is lower. The older the borrower, the higher the percentage. The $625,500 lending limit amount expires at the end of 2009 unless Congress acts to extend it.

The down payment money that borrowers have to come up has to be from savings, retirement income or proceeds from the sale of an existing home. If the existing home is sold to provide the down payment for the new home, there are fewer closing costs involved than if the transactions were done separately.

Once the title on the home changes hands, the loan amount, along with accrued interest, mortgage insurance premiums and other fees, has to be repaid to the lender.

"It's not free money. It's a rising debt loan," said Smith.

That said, the product can be used to help retirees downsize to a smaller home or help renters become homeowners, she said. "They won't have to make a (mortgage) payment for the rest of their life," Smith said.


HOME EQUITY CONVERSION MORTGAGE (HECM) FOR PURCHASE REVERSE MORTGAGE
1. Must be age 62 or older.
2. Property can be a single-family house or condominium and must be the primary home. Investment purchases not allowed.
3. Loan amount is a percentage of the reverse mortgage $625,500 lending limit or appraised value of purchased home, whichever is lower. The older the borrower, the higher the percentage of loan amount.
4. Borrower must have substantial funds available for a down payment either from the sale of an existing home, savings or retirement income at time of closing.
5. No credit or income restrictions.
6. Borrower must participate in a consumer information session given by an approved HUD-approved counselor.

The subprime to prime mortgage handoff

Data released by the Mortgage Bankers Association confirms the trend that prime borrowers are the ones to worry about.

While the percentage of mortgages entering the foreclosure process in the 2Q held relatively steady at 1.36%, the change in composition is noteworthy.

From the MBA press release:

While the rate of new foreclosures started was essentially unchanged from last quarter’s record high, there was a major drop in foreclosures on subprime ARM loans. The drop, however, was offset by increases in the foreclosure rates on the other types of loans, with prime fixed-rate loans having the biggest increase. As a sign that mortgage performance is once again being driven by unemployment, prime fixed-rate loans now account for one in three foreclosure starts. A year ago they accounted for one in five.

Another interesting bit for taxpayers - there’s been a big jump in FHA foreclosures, currently at 1.15% percent. The FHA is essentially a government mortgage insurance agency so foreclosures. While the FHA brags on its website that it’s self-funded, if the losses become too much, it’s safe to assume in the current environment that the government would extend a helping a hand.

Also, it’s the FHA that essentially took on subprime lending last month when it agreed to give mortgages with negative equity in their homes. In July, it loosened its criteria so homeowners significantly underwater could refinance into an FHA loan. These borrowers can now borrow 125% of their home’s worth, up from 105%.

UPDATE: MBA just got back to me about what’s included in their prime category and it looks like Alt-A loans are mostly categorized as prime by those banks participating in the survey. That could be skewing things since Alt-A loans by definition are less than prime and extremely loose lending standards during the boom have made them look more like subprime loans. For example, borrowers taking out an Alt-A loan could state their income rather than prove it.

Tips on buying a home

When you hear advertising for REVERSE End Mortgages and the lender says you must buy mortgage insurance to cover your loan if you can’t pay for it. Bull!

1. Before some PMI (private mortgage insurance), the home must go into foreclosure.

2. When getting loans that seem like a terrific deal, ask questions, before it becomes too late.

3. If you try to sell your home and prices are still low and your offer to purchase your home is not what you as a seller wants, ask your lender about a short sale. This means what is due against the loan. Sometimes this is doable and can be worked out and if you were told to buy PMI insurance it’s with the understanding it is a great deal for you––wrong. This is only if you can sell the home.

4. When you go searching for a loan, just remember that if you use a secondary market that is used for a lesser down payment or no down payment, the mortgage on your home is sold after 90 days or whatever pleases your lender. It could sell three to six times more (change lenders). You, the original lender, never know or you could get lucky and not be sold at all. But if it is sold, remember each time your loan changes hands, the previous lender needs to file a release at the recorder’s office in the county your property is located in, so when you choose to sell, it goes smoothly.

There probably isn’t a person who at one point in time in their life that doesn’t want to own a home! But here is some food for thought. Try the lenders in your hometown and make sure you are comfortable with the loan and the terms.

If you choose to go online or go elsewhere, check with someone who has used that lender.

I have used lenders outside of home boundaries and I interrogate them to make sure they are the quality we need to be using.

Ask every question possible when going to purchase a home, when using PMI and make very sure you don’t have to be homeless and sitting along the street or in a tent or your car, when the air has cleared.

Buying a home or an investment property is still the American dream, but make sure it’s your dream and you have good results.

The Meaning of a Buyer’s Market

In the world of real estate investing, it is very important to pay attention to market conditions for they will dictate whether it is the best time to make a move or wait things out. With all that has been happening in the housing industry and financial sector these days, many experts and analysts are saying that it is indeed a buyer’s paradise.


When you hear the term “buyer’s market”, you can safely assume that buyer’s have the upper hand. In terms of investing in real estate properties including foreclosure homes, it could mean three things: low asking prices, acceptable interest rates and large inventories.

These three factors are very important if you want your foray in the world for real estate investing to be successful. If they are present, you will never go wrong. At present, you will be delighted with the many homes for sale to choose from, the high affordability of these homes and the reasonable interest rates. Keep in mind that having a high credit score.

Of course, having the advantage will mean enjoying certain perks. For example, you can always ask sellers to lower their asking prices during negotiations. If this is not possible, you can look for a seller offering incentives like shouldering closing costs.

Considering that it is a buyer’s market, you should not hesitate to ask for such things especially because of the tough competition among these sellers. And with the foreclosure crisis still rampaging on, most of the lenders/sellers are slashing down asking prices for these foreclosed properties in order to reduce their inventory and control holding costs.

A buyer’s market should be taken advantage of considering that, sooner or later, the market will eventually balance out. In an ideal market, the buyers and sellers are on equal footing and you should definitely not wait for this to happen if you do not want to lose all those advantages.

CORRECT: New Mortgage Insurance Applications Up In June

DOW JONES NEWSWIRES
New residential mortgage insurance applications rose in June from a month earlier, but the number was the second-smallest in the past seven months, according to a survey of the biggest private mortgage insurers.

Mortgage defaults grew slightly in June from May while cures fell in the same period. Defaults and cures remain elevated from a year earlier, though defaults have fallen from the highs in December and January and cures are lower than in February and March.

Insurers received 56,271 new applications for mortgage insurance in June, up 1.5% from May but 38% below June 2008.

New insurance written grew 11% to $7.65 billion in June from May but fell 44% from a year earlier.

The total amount of mortgage value that is covered by private mortgage insurance was $915.1 billion in June, with insurance typically guaranteeing a portion of that amount. In June, total insurer exposure was $209.6 billion.

Covered mortgages that went into default, or became at least two months overdue, rose 0.5% to 88,362 in June from May and jumped 30% from a year earlier.

Defaulted mortgages that cured, or were brought current after being at least two months overdue, fell 1.3% to 51,908 in June from a month earlier but were 20% more than in June 2008.

Mortgage insurance protects lenders from losses on defaulted mortgages and is typically required on mortgages obtained with less than a 20% down payment.