Loan Officer Training 08/15/2024 - How to Structure Property Insurance for Financed Properties

In this episode of Loan Officer Training, we focus on the essential task of structuring property insurance for financed properties. Proper insurance coverage is crucial for protecting both the borrower and lender's interests, ensuring that assets are safeguarded against potential risks.

We'll break down the different types of property insurance policies, such as hazard insurance, flood insurance, and mortgage insurance, and discuss how to determine the appropriate coverage levels for different property types. Gain insights into the lender’s requirements and how to guide your clients in selecting the right policies to meet these criteria. We’ll also cover common pitfalls to avoid and tips for working with insurance providers to secure the best terms for your clients.

Whether you're dealing with residential or commercial properties, this episode provides valuable guidance on how to ensure comprehensive protection for financed properties, fostering client trust and confidence.

Tune in to equip yourself with the knowledge to expertly navigate property insurance requirements in the mortgage industry.

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The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as over 5,000 Non-QM mortgage loan programs using alternative income documentation! 

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of over 350 licensed Mortgage Loan Originators can assist ou

Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

Loan Officers for Unlimited Free Non-QM Leads & Trainings Join The Mortgage Calculator at https://themortgagecalculator.com/join

The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as over 5,000 Non-QM mortgage loan programs using alternative income documentation!

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of over 350 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as access...

Transcript

Restream recording Aug 15, 2024 • 11:07:27 PM: 0:13

All right. So welcome everyone. My name is Kyle Hiersche. I am the COO of the Mortgage Calculator joined here by our CSO, Jose Gonzalez. We are a lender that specializes in non QM loans. And what we do every Tuesday, Wednesday, and Thursday evening at 7 p. m. Eastern on this show is go through a new loan officer training topic. And tonight we're going to be talking about structuring property insurance for finance property. So Jose, I'll go ahead and let you take it over from here. All right, good evening everybody. Thank you for joining us for tonight's training. Yeah, we're going back to the basics in the last few here because we know we're getting a lot of applications and we're getting a lot of loan officers getting really busy. So we want to make sure that the I's are dotted. And the T's are crossed. So today we're going over how to properly structure the property insurance for, your loans, right? Whether it's a purchase or whether it's a refi. So let's get right into it. You know, this is a critical to understand a lot of these things because the last thing you want to happen to you is, have your deal get stuck because you didn't pay attention to the tips and tricks that we're telling you here. And you get hit with a last minute condition. So what exactly is insurance? Right? For those of you that, you know, don't own a property or for those of you that don't own any type of asset that needs to be insured, right? Well, insurance, specifically property insurance, protects the property against damage, loss, and liability. Damage to the property, Loss, usually a financial loss by the insured or some type of a liability claim made against the insured, the insured, would be our borrower in that case, but remember there's additional interests that come into play here, which we're going to be discussing, which are the interests of the lien holder. Property insurance ensures that the assets value is preserved, right? If you have one of those covered losses, damage, or liability, you don't want a bankrupt owner. You don't want a property that can't be rebuilt, right? That once it was damaged. You have a 300, 000 lien on it. Now be aware lending guidelines, pretty much this one is going to be across the board, right? Lending guidelines require property insurance for finance properties. Now, in the case of a second mortgage, right? As you have property insurance on the first mortgage. They'll ask you to provide proof of the insurance and in some cases, ask you to add them as an additional interest. In some cases not, but you already have insurance. Please note that the minimum dwelling coverage amount is always going to have to equal the lesser of, notice I say the lesser of, the loan amount or the replacement cost of the loan. Of the structure, right? You're insuring the structure. You're not insuring the structure plus the land. So you need at least a dwelling amount equal to the replacement cost of the structure or the loan amount, the lesser of the two. And the replacement cost of the structure is usually going to be determined by a replacement cost estimate. Document that is usually available from the agents, insurance agents. Stating what value they used to determine the coverage amount. Please also note that the investor or the lender needs to be added usually as an additional interest in the policy declarations page via the mortgagee clause and the loan number, right? You want the mortgagee clause and their loan number to protect their interests. Now, what are the types of insurance policies out there, right? You want to be sure when an underwriter hits you with a requirement or when you're looking at what is potentially going to be needed, that you're able to consult the borrower in the proper manner, right? So, uh, hazard insurance or usually called homeowner's insurance. damage caused by natural and more. Now, please note is going to be maybe a se from your homeowners. Now the one that's going to p the structure for your st of losses is going to be either a DP3. That's going to be the lowest cost full coverage policy that's usually used for investment properties only. So it's going to be either a DP3 or it's going to be an HO3, which is your standard homeowner's policy for an owner occupied one to four unit property. So remember the DP3 is for investment properties, usually going to be a premium. The HO3 Is for owner occupied non rental properties. The H 06 commonly referred to as walls in coverage is for condominiums where the condominium associations, insurance coverage covers the exterior of the building, you know, the walls and all the structural stuff. And the, interior coverage of like kitchen cabinets, interior walls, flooring, as well as liability insurance. Like if you get a leak and it leaks down four floors, damages a bunch of apartments that would be covered by liability insurance. Flood insurance covers damage caused by flooding, which is usually an exclusion from the hazard coverage. and is required in FEMA designated flood zones. Keep in mind now, real important, usually the only policy that you're going to be required in some cases for the borrower to pay for it prior to, um, underwriting accepted is a flood policy. Because in many cases, the flood policy will not be bound unless it's paid for. Any of the underwriters already know that. So they're going to ask the flood policy. to be bound and paid for and proof of payment to be submitted. Windstorm coverage is going to be a mandatory coverage in certain high risk wind prone areas where the carriers require it as a separate coverage. I'm going to give you an example of this. South Florida, that's my local market, has U. S. Highway 1. That's a highway that goes all the way from Key West all the way up to New York. It has U. S. Highway 1 and then it also has the I 95. So, if your property is either east of US1 or east of I 95, whichever is applicable, your policy, your regular hazard policy does not include windstorm and you have to pay for a separate windstorm policy. So usually the combination of the hazard policy that doesn't include windstorm and the windstorm policy is going to be more expensive than a regular hazard policy that does include windstorm because it's a higher risk area. For now, earthquake insurance, you may have read into this in some states like California, is obligatory as a separate coverage just like windstorm and earthquake prone. Areas. So be aware when you are structuring your deals, if any of these additional coverages are going to come into play because it will result in additional cost to your borrower and will affect your DTI or your DSCR, whichever is applicable. So don't get caught by the by surprise and have the deal fall apart. Now, keep in mind that the collateral needs to be protected, right? The lender, the investor, the bank put a big lien on the property and they want to make sure that their collateral is protected by the insurance. But they also want to make sure that their interests are protected. How is this done? Well, you heard me mention a little bit ago about the mortgagee clause and loan number. Well, Specifically, the mortgagee, the mortgagee clause identifies the lender as a party with a financial interest in the property. So, this safeguards the lender's interest and allows the lender to receive compensation directly in the event of a covered loss. So, the check's not going to go directly to the borrower, in the borrower's name only, because you know what's going to happen there, right? The borrower's going to cash the check. Spend the money and then what's going to happen with the repairs? Oh no. Right now, the collateral has been prejudiced. It's lost value and we have a serious problem. Now, mortgagee clause is usually going to be ABC company, ATAMA forward slash ESAU, right? ATAMA as their interests may appear forward slash ESAU, it's successors ends or signs the ATAMA part. Assures that the lender's interest is recognized even if the policy details change and the its successors and or assigns part designates the servicer who bought that, you know, has another servicing rights as an authorized agent for the policy communication. This is super important because you know how often these loans get changed hands as far as servicing. This ensures that lenders interests are upheld regardless of policy changes and streamlines the claims processing and protects the investment. Please note then how important the mortgage clause is and the loan number as well as getting, you know, the name and everything correct on the policy because the loan underwriter is going to complete a pre closing confirmation to ensure that the mortgage clause and loan number are correct. The coverage amount is equal to the lesser of the loan amount or the replacement cost estimate and that rental properties have rental loss coverage equal to a minimum six months PITI and an applicable association fee. So don't forget for you to check these items before you submit that evidence of insurance to underwriting for review to make sure you don't get hit with undue conditions. And what are some additional considerations for investment properties to make sure that you don't again get hit with any last minute conditions? Well, you just heard me talk about this one. Rental loss coverage equal to six months PATIA is required for all investment properties. So, make sure when you do get that evidence of insurance that rental loss coverage is on there. If you don't specifically see it on there, but they make some references to the policy, then you may need to get a copy of the policy to confirm that that coverage is included. Maybe it's like a rental property only policy and automatically includes it, but you got to go into the actual policy jacket to review that. So you may need the policy jacket. You may need an email from the agent confirming that in writing. If you can't find what you need in the policy jacket. Rental loss coverage, uh, covers against property damage, liability, and rental income loss. And most importantly, this ensures consistent rental income flow for the investor, even during repairs of uninhabitable units, which will mitigate the financial loss due to tenant related issues. Also like the tenant not paying rent. Or having to evict the tenant. So you could see why it is such a sound financial advice for the underwriting, uh, to require rental loss coverage. Right. And last but not least, you see our very helpful loan officer there with the checklist for a successful closing, right? This case, he's looking at the insurance checklist. That we're going to cover here. So please make sure to, that the borrower provides a paid or to be paid, or you obtain these from wherever you have to obtain it from the agent, provide a paid or to be paid receipt for refinances, as well as purchases. Definitely. But for refinances is where it confuses some people because they're saying, you know, we're not paying for a new policy. I already have that policy. Why do I have to provide proof that it's paid? Well, because what if the policy was financed, right? Through a finance company and there is no proof of payment. So, just make sure that you reach out or the borrower reaches out to the insurance agent. They can usually put together a quick pay receipt if the property has been paid or if not, the amount due to be collected at closing for either the purchase or the refi. Please note that the insurance should not be paid for before closing unless it is an insurer requirement like it is in many cases for floods. Make sure you always let your borrower know that they can pay for the required, homeowners insurance at closing. Please do ensure that the closing date is on or after the effective date of the policy. If your policy has an effective date of August 25th and you want to close on August 20th, guess what? You're not going to be able to close on August 20th until you get the effective date of the policy updated. Also note, in some cases when you're doing a refi. And the policy renewal is coming up pretty soon. You may have your buyer or slash borrower, excuse me, your borrower may be required to pay for the renewal at closing. Even if the renewal may not be due for 60 or 90 days, it really depends on the underwriting guidelines of the investor. That's going to be behind that loan, right? Because in some cases I've seen it, if the policy renews within 60 days of closing, then they collect for the full. Costs of the renewal would sometimes become an issue becomes an issue of the renewals, not yet been issued. You know, the cost of the renewal ensure that the borrower name and insured name match, right? In other words, the insured name on the declarations page has to match whoever is the borrower or else, you know, you may have a coverage issue, definitely underwriting is not going to accept it. No. With that being said, please note that business purpose loans usually need to have the entity name as the, as the insured name, as the name insured. That becomes a problem with some carriers that don't directly insure an entity, but what they do is add the insured under a personal name and add the entity as an additional insured. Please note that the property address match exactly. I mean, down to the Southwest being SW instead of Southwest. Everything needs to match unit number, street, all of that kind of stuff. As previously covered, coverage amount needs to be the lower of the loan amount or the replacement cost estimate per the replacement cost estimate provided by the insurance agent. Thank you. Do not automatically tell a borrower. Oh yeah, you're buying it for 500, 000. We need 500, 000 of insurance. You can end up with a, you know, 30, 000 insurance bill in some areas like South Florida. So please know, and also it doesn't have to be the loan amount either because in some cases the loan amount could be almost a purchase price for an FHA loan. It simply needs to be The lower of the cost to replace the structure, which is determined by the RCE or the loan amount. So if the loan amount is 150, 000 and the cost to replace the structure is 300, 000, you only need to insure 150, 000 for purposes of the loan. Now, the borrower may want to insure the cost to replace the structure, but for purposes of the loan, you only need to document the enough coverage to cover the loan amount. Since the loan amount was lower than the replacement cost of the structure. Conversely, if it costs, if the loan amount is 500, but the RCE replacement cost of the structure is only 200, you only have to insure 200. Now, every now and then I catch that mistake, uh, and I correct it for the MLOs, but hey, you, you could be costing your borrower. a lot of money if you're telling him to over insure the property without they're really needing to or wanting to. And like I already mentioned, remember that investment property policies need a minimum rental loss coverage equal to six months PITI, Prince of Interest Tax and Insurance, and if applicable, association fee and mortgage insurance as may be applicable. So remember all these tips and tricks on insurance. Remember you can help your borrower obtain insurance quotes as well. They want to obtain their own, you obtain it for them. Also compare notes and see who provided the best deal. Because insurance is part of the DTI or the DSCR and in some cases can make or break the deal. All right. Thank you, Jose. I don't see any specific questions here. Definitely great to know. All right. Okay. We'll go ahead and wrap it up then. Remember, That we do this every Tuesday, Wednesday and Thursday evening at 7 PM Eastern, where we do a new loan officer training topic. So we will see you all next week on Tuesday, 7 PM Eastern for the next episode of the loan officer training series with the mortgage calculator.