Mortgage Lender Requiring Excessive Homeowners Insurance

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rsims2021
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Joined: Tue Mar 02, 2021 12:54 am

Mortgage Lender Requiring Excessive Homeowners Insurance

Post by rsims2021 »

Hi everyone. I could use some guidance on an issue that has arisen as we work through our first home purchase.

Long story short. I've talked to four different Homeowners Insurance companies that have calculated a total dwelling coverage requirement of around $300k for the new policy. All four have run through the standard questions in order to compile a rebuild estimate using local construction costs.

Our lender (bank) is demanding that either:
a) We secure dwelling coverage for a total of $520k (Appraisal cost minus land assessed value)
OR
b) The insurance company produces a signed letter stating that their estimated cost for a rebuild of the property is $300k

Every insurance company has stated that they are not authorized to produce such a letter, and that the dwelling coverage calculator should be all my bank needs to proceed. My bank on the other hand states that due to Fannie May rules, they are required to obtain a separate signed letter regarding the dwelling estimate in order to accept the insurance.

On top of this, only two of the insurance companies I've talked to will even issue a quote with $520k dwelling coverage because they believe that I will be wholly overinsured. At this point I've been forced to go with one of the companies that agreed to fudge the numbers on the estimator to get to $520k, and as a result my yearly premium is 40% higher than it should be.

Since my bank mentioned Fannie May requires this letter, I've been researching their homeowners insurance requirements but cannot find anything that mentions this. Fannie May clearly states that dwelling coverage should equal the lesser of the a) Insurable value of the home or b) the unpaid principal balance of the loan.

Thanks in advance for any guidance you can provide. All my bank will tell me is that they spoke with their manager and it is out of their hands.
dknightd
Posts: 3727
Joined: Wed Mar 07, 2018 10:57 am

Re: Mortgage Lender Requiring Excessive Homeowners Insurance

Post by dknightd »

I would be surprised if a house with a $520k assessed (less land) value could be rebuilt for $300k. Are you insuring for full replacement cost? Any way, you either have to keep the bank happy, or, find another bank.

edit: think about it, if the house you are going buy could be replaced for less than what you are paying for it, why not buy an empty lot and have a nice new house built on it? It would save you money!
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
jharkin
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Location: Boston suburbs

Re: Mortgage Lender Requiring Excessive Homeowners Insurance

Post by jharkin »

dknightd wrote: Tue Mar 02, 2021 6:51 am I would be surprised if a house with a $520k assessed (less land) value could be rebuilt for $300k. Are you insuring for full replacement cost? Any way, you either have to keep the bank happy, or, find another bank.

edit: think about it, if the house you are going buy could be replaced for less than what you are paying for it, why not buy an empty lot and have a nice new house built on it? It would save you money!
+1000

A home that has the structure alone appraised for 520k, probably has a total structure+land value of what? 750k to 1MM? (depending on location and lot size). Where I live, rebuild costs are typically higher than the existing depreciated building value... even more so in the last year due to the COVID spike in materials cost.
dknightd
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Re: Mortgage Lender Requiring Excessive Homeowners Insurance

Post by dknightd »

jharkin wrote: Tue Mar 02, 2021 7:11 am Where I live, rebuild costs are typically higher than the existing depreciated building value
I suspect that is true everywhere.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
Topic Author
rsims2021
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Joined: Tue Mar 02, 2021 12:54 am

Re: Mortgage Lender Requiring Excessive Homeowners Insurance

Post by rsims2021 »

Unfortunately home prices are sky high in the D.C. area. The home is only 1500 square feet, hence the lower rebuild cost estimate. I've now spoken to 4 different agents that all came to that number for a total rebuild associated with coverage A for dwelling. Total market value of the land + home is $760k.
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BrandonBogle
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Re: Mortgage Lender Requiring Excessive Homeowners Insurance

Post by BrandonBogle »

For one I would make sure you are getting a “replacement cost value” policy and not an “actual cash value” policy.

Assuming that is being done and your lender isn’t accepting the insurers evaluation (this is typically available as an official doc from the insurer’s underwriting process), then the next step would be to either get “extended replacement cost coverage”, which provides a multiplier on the evaluation. Riders/enforcements with 125% and 150% extended replacement cost coverage are common and should cover the gap.

Alternatively, you can get a “guaranteed replacement cost coverage” policy. This rider/endorsement means the insurer will replace the home regardless of the cost to do so. They still do an evaluation to determine your pricing, but the actual value is immaterial to others as the policy has no cost limit. Be warned those that not all agents and not all insurers offer this coverage and it will likely be the most expensive of the bunch as it carries the most “unknown” risk.

Personally I have an agent that writes policies for multiple companies like Travelers, Erie, and others. What I love about this agent versus others is they can write a guaranteed replacement cost coverage “named exclusion” policy. This isn’t related to your question, but that last part is what sold me on this agent. Many policies are written as “named peril”, meaning only the items explicitly identified in your policy and riders are covered. A named exclusion policy works the other way and covers everything except was is explicitly excluded from coverage. That provided peace of mind comfort and price shopping this policy vs. a named peril policy from another agent for the same insurer (with the same coverage options) wasn’t much more expensive.
rooms222
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Re: Mortgage Lender Requiring Excessive Homeowners Insurance

Post by rooms222 »

Here is a seminar in Florida, where insurance agents appear to have fought over this issue. http://www.independentagent.com/Educati ... uments.pdf

There is also a 2015 compliance discussion citing the same Florida statute and administrative rule.

Here is a longer version of the seminar- https://www.faia.com/getmedia/180fa05d- ... x?ext=.pdf
kmcartcart
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Joined: Wed Mar 02, 2022 5:28 pm

Re: Mortgage Lender Requiring Excessive Homeowners Insurance

Post by kmcartcart »

Found this post because I'm in the exact same spot in Chicago. Think that it only becomes an issue in places where land value is higher than the value of the home, because the amount of "wiggle room" allowed in dwelling coverage doesn't cover the full cost of the land. Said differently, we're buying a $1.35M home and the dwelling coverage is assessed at ~$650K, but that makes sense because a lot a quarter-mile away is selling for $900K. USAA will only allow me to cover 150% of the dwelling value, which gets me to $970K aka not enough for my lender.

Basically, I've discovered that there is a long history of lenders demanding coverage up to the loan or appraisal amount basically out of a misunderstanding of what it includes (e.g., not the land). This has occurred even though it is illegal in many states (https://www.independentagent.com/vu/Sit ... -State.pdf).

When my insurer (USAA) told me to point out to my lender that it was illegal, they basically said kick rocks. So now I'm trying to find an insurer who will take my extra premium $ for a value that they will never have to pay out (since they can't rebuild land).

Just writing to commiserate. See the long list of articles that do some justice to the issue and show how long it's been a problem:

https://www.orlandosentinel.com/news/os ... story.html
https://www.deseret.com/1994/9/11/19130 ... -insurance
https://www.washingtonpost.com/archive/ ... 2d538f663/
https://www.chicagotribune.com/news/ct- ... story.html
https://www.latimes.com/archives/la-xpm ... story.html
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