Home Insurance Understanding mortgage insurance

Understanding mortgage insurance

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Understanding insurance
Understanding insurance

Property Mortgage Insurance

Your property must always be sufficiently insured through an acceptable insurance company or carrier.  If your property is not currently insured or your insurance policy is about to expire, you must act quickly to keep your property mortgage insured.

How must I provide evidence of insurance coverage?

When providing updated insurance information, please have all your insurance policy information available, such as policy number, effective and expiration dates, premium amount, deductible and coverage amounts, and the name and address of your insurance company and agent.

What insurance types and how much insurance coverage are required?

You are required to maintain homeowners insurance (also called hazard, mobile home, vacancy, renters, landlord, or fire coverage) according to your Mortgage or Deed of Trust. The homeowners’ policy must meet the following requirements.

  • Insurance must be with a company or carrier rated “B” or better according to the Best’s Key Rating Guide. 
  • A minimum of fire and extended coverage with special form endorsements must be maintained at all times.
  • The amount of insurance coverage must at least equal the lesser of:
  • 100% of the insurable value of the improvements as established by the property insurer, or
  • The unpaid balance of the mortgage, with a replacement-cost endorsement to compensate for the full amount of damage/loss to improvements, or
  • Replacement costs according to state regulations.

A proper deductible must be carried depending on your loan type.  The deductible for homeowners/flood insurance should not exceed the higher amount of $1,000 or 1% of the dwelling coverage.  The deductible for windstorm/hurricane insurance should not exceed the higher amount of $2,000 or 2% of the dwelling coverage. 

When insuring your home, you should insure it for the total amount it would cost to rebuild your home if it was destroyed.  If you do not have sufficient insurance, your insurance company may only pay a portion of the cost of replacing or repairing damage.

There are three ways of insuring your home.

  • Replacement cost is insurance that pays the policyholder the cost of replacing the damaged property without a deduction for depreciation but is limited to a maximum dollar amount.
  • Guaranteed replacement cost is insurance that pays the policyholder the full cost of replacing damaged property without a deduction for depreciation and without a dollar limit.  This coverage is not available in all states, and some companies limit the coverage to 120 percent of the cost of rebuilding your home.  This gives you protection against a situation such as a sudden increase in construction costs due to a shortage of building materials.
  • Actual cash value is insurance that pays the policyholder an amount equal to the replacement value of the damaged property minus an allowance for depreciation.  Unless a homeowners policy specifies that property is covered for its replacement value, the coverage is for actual cash value.

For a quick estimate of the cost of rebuilding your home, multiply the local building costs per square foot by the total square footage of your home.  To find out the building rates in your area, contact your local builders association or real estate appraiser.

The following factors will determine the cost of rebuilding your home.

  • Local construction costs
  • Square footage of the structure
  • Type of exterior wall construction, such as frame, veneer, or masonry (brick or stone)
  • Style of home, such as ranch or colonial
  • Number of bathrooms and other rooms
  • Type of roof
  • Special features, such as attached garages, fireplaces, exterior trim, and arched windows

Remember to check the value of your insurance policy against rising local building costs each year.  Ask your insurance agent or company representative about adding an “Inflation Guard Clause” to your policy.  When you renew your policy, this will automatically adjust the dwelling limit to reflect current construction costs in your area.  Also, remember to increase your policy limit if you make improvements or additions to your home.

Commercial properties must maintain coverage as agreed in your Mortgage or Deed of Trust.

What are the types of insurance coverage?

  • Hazard insurance (also called homeowners, mobile home, vacancy, renters, landlord, or fire coverage) ensures the property will be replaced or the damage repaired up to the amount of coverage obtained.
  • Flood insurance is mandated by the federal government and is required in areas where there is a high risk for flooding to occur (flooding has occurred in the last 100 years).  The Federal Emergency Management Agency (FEMA) determines flood zones.  Flood zones A and V are flood zones that require flood insurance. Flood zones B, C, D, and X do not require flood insurance.
  • Windstorm/Hurricane insurance is a required policy in high-risk areas.  This coverage is provided in a separate policy for Hawaii, coastal areas of Florida, and the Gulf Coast states. Generally, this coverage is included with the homeowners’ policy.
  • Homeowners Association insurance (also called condominium coverage) is held by the property association.  This type of insurance generally covers the dwelling only, and not the contents within the dwelling.
  • Earthquake insurance is not required by the Deed of Trust.  This type of insurance is carried on a voluntary basis for coverage if the property sustains damage from an earthquake.
  • Subsidence insurance is required in areas at high risk for land subsidence.  Land subsidence refers to ground surface movement that may occur in areas overlying underground mines.
  • Contents insurance is not required by the Deed of Trust.  This type of insurance is carried on a voluntary basis if not included in the homeowners’ policy.  This policy covers the contents within the dwelling.
  • Liability insurance is coverage that protects the insured/mortgagor against the risks related to personal liability claims made by other parties for injuries suffered while at the property.

How do I change my insurance carrier?

If you wish to change your insurance carrier, follow these steps:

  • Ensure your policy meets the insurance requirements previously outlined.
  • Contact your current insurance carrier to cancel coverage. Failure to do this may result in you not receiving a refund if one is due.
  • Send a copy of your new policy and a letter of authorization for the new insurance carrier to our Insurance Department via regular mail or facsimile as soon as possible.  You may be required to pay the annual premium if payment has already been made to your current insurance carrier.

If I have an escrow account for insurance and would like to change insurance carriers, may I request that a payment for the new premium be sent from my escrow account?   

If requested, a check may be sent from your escrow account to your new insurance carrier.  It is important that you cancel your previous coverage and request that any refund be returned to your escrow account.  If the refund is not returned, a shortage in your escrow account could occur and cause your monthly payment amount to increase.  

What should I do when my insurance is being cancelled?   

If your policy is being cancelled, please contact our Insurance Department immediately via regular mail, overnight mail, phone, facsimile, or email so that we may assist you.  Failure to replace a cancelled policy will result in the application of lender placed insurance coverage. 

What is lender placed insurance?

Lender placed insurance is coverage that has been obtained by the lender when the customer’s insurance has lapsed or been cancelled, or proof of the customer’s insurance has not been received.  Lender placed insurance coverage is necessary to protect the lender’s interest in the property if damage was to occur and the customer had not maintained adequate coverage.  It is typically more expensive than insurance coverage the customer purchases because it must cover all properties, in all locations, and in all conditions.  Lender placed insurance does not provide coverage for contents or liability.

How may I cancel lender placed insurance coverage?

Lender placed insurance coverage is provided in the absence of customer provided insurance coverage.  Lender placed insurance coverage will be cancelled once Lender receives and verifies proof of customer provided insurance coverage.  You will not be charged for the lender placed insurance coverage if the customer provided insurance coverage is continuous.  However, if there was a lapse in coverage, you will be required to pay for this insurance coverage for the period of time the lender placed insurance coverage was in effect.

What is the maximum deductible amount?

The deductible for homeowners/flood insurance should not exceed the higher amount of $1,000 or 1% of the dwelling coverage.  The deductible for windstorm/hurricane insurance should not exceed the higher amount of $2,000 or 2% of the dwelling coverage. 

How do I file an insurance claim if my property has sustained damage?

Please notify your insurance agent if there is damage to your property.  Your hazard insurance company may issue a loss draft/claim check to cover the damage.  Checks are typically issued in the names of both the property owner(s).

Flood Insurance

The federal government passed a bill in 1994 that requires flood insurance for property located in flood zone A or V as determined by the Federal Emergency Management Agency (FEMA).

How may I cancel flood insurance?    

If your property lies within flood zone A or V, you are required to maintain and provide proof of flood insurance coverage.  If you believe your property is not or is no longer within one of these mandatory flood zones and would like to discontinue your flood insurance, please provide at least one of the following documents to serve as evidence that your property is not or is no longer in a mandatory flood zone.  Once we have reviewed the documentation, we will notify you in writing if the flood insurance may be removed from your loan.

  • Letter of Map Amendment (LOMA)
  • Letter of Map Revision (LOMR)
  • Appraisal
  • Survey
  • Elevation certificate*
  • Official FEMA map revision*

*Issued directly by FEMA.

Mortgage Insurance

Mortgage insurance is insurance written by a private company or FHA that protects the lender from losses if the customer defaults on the loan.  Private Mortgage Insurance (PMI) is usually required by private mortgage lenders for customers who make a down payment of less than 20%, regardless of the customer’s credit standing.  Mortgage insurance limits the lender’s exposure to financial loss resulting from loan default.

Typically, on a primary residence, the minimum down payment amount needed to eliminate PMI is 20%.  If your down payment is less than this amount, but you wish to avoid PMI, your lender may have alternative products and pricing options they may offer instead of PMI.

How long will I be required to have private mortgage insurance (PMI) and/or when may it be cancelled?       

The Homeowners Protection Act of 1998 allows customers whose loans originated after July 29, 1999, to request cancellation of PMI (not FHA insurance) at an 80% loan to value (LTV) ratio based on amortization or actual payments if the customer:

  • Has a good payment history,
  • Provides evidence the property value has not decreased, and
  • Certifies there are no subordinate liens on the property.

Lenders/Servicers are required to terminate customer-paid PMI at 78% LTV based on the amortization schedule if the loan is current.  If none of the above is done, PMI will terminate automatically at the midpoint of the loan term.

For loans originated prior to July 29, 1999, PMI guidelines will vary from lender to lender and may change at any time.  Some investors will not allow the cancellation of PMI.  PMI is normally required on your loan for a minimum of 24 consecutive payments if there is no law indicating otherwise.  After that time, if you have 20% or more equity in your property and meet certain other conditions, you may request to have it removed.  There is no guarantee your PMI will be removed, and most loan investors will require a new appraisal at your expense prior to removing PMI.

How much does private mortgage insurance (PMI) cost?

Premium amounts for PMI vary.  The cost of PMI is divided into two parts.  The first part is a payment made at the time of closing.  The second is an ongoing payment made each month with your principal and interest mortgage insurance payment.

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