Insurance costs are a component of the debt to income ratio (DTI) used to qualify a borrower for a loan, so it’s logical that lenders pay attention to the costs of their borrowers’ policies. But should they care about the coverage of their borrowers’ policies?
Aside from making sure that the replacement estimate meets the appraised guidelines, or ensuring that the borrower carries flood insurance in a required flood zone, do Lenders need to care about other policy details?
A bad policy, or deficient coverage can put the lender’s asset, against which the client is borrowing, at tremendous risk. Two areas in particular can create problem scenarios.
Clients that chooses high deductibles simply to save on annual premiums, put themselves and their lender in jeopardy. If borrowers don’t have the income or savings to cover a high deductible following a loss, it could lead to the property falling into disrepair thus increasing the foreclosure risk.
Inadequate or Missing Coverage.
Borrowers will frequently reduce coverage, or waive coverage recommendations altogether, just to save a few dollars on annual premiums. Here are some key coverage facts that lenders and borrowers should know:
- Homeowners’ liability coverage is inexpensive. Stripping a policy down to $100,000 in liability coverage will only save a few dollars a year, and greatly increases the insureds exposure. COMPARITY recommends a minimum of $300,000 in liability coverage for all insureds, and suggests that insureds buy the maximum coverage available if possible.
- Older homes should always have “Ordinance & Law” or “Building Codes” coverage. Failing to have this coverage could result in the insured having a large out of pocket expense in the event of a loss. COMPARITY automatically recommends this coverage to any homebuyer that is purchasing a home that is more than 20 years old.
- Make sure that policies have “Extended Replacement” Coverage. This helps guard against inflation and rising building costs that could threaten the insured ability to be made whole following a loss. COMPARITY requests that all agents quote at least 25% extended replacement on all homeowners’ insurance quotes.
Insurance is another area where Lenders can help borrowers make good decisions. Always recommend that your borrowers compare their options, seek the advice of a knowledgeable agent, and remember that saving a few dollars today isn’t as important as properly protecting the borrowers most important asset. It’s important to be price conscious, but don’t be “penny wise and pound foolish.”
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