It is difficult for most people to get a mortgage, especially when insurance is not provided. Homeowners insurance is usually required for mortgage approval since it covers both the homeowner and the lender in case of loss due to damage or destruction of the property. This article discusses the consequences of not having insurance and offers tips on how to overcome such obstacles in getting a mortgage.
Understanding the role of insurance in mortgages
Homeowners insurance is required for mortgage approval since it guarantees that the investment of the lender is secured. If a borrower does not have sufficient insurance coverage, the lender can force-place insurance, which is more costly and only covers the interests of the lender.
Types of insurance involved
- Homeowners insurance: This type of insurance covers damages to the property and also has liability coverage. It is required by lenders to make sure the property remains a good collateral for the loan.
- Mortgage insurance: This insurance, similar to Private Mortgage Insurance (PMI), is usually required for buyers making a down payment of less than 20% of the home price. It insures the lender in case of default but not the homeowner.
Strategies for overcoming insurance-related mortgage problems
To counteract the shortage of homeowners insurance, the following should be done:
- Shop around for insurance: Compare rates from several insurance companies and find the lowest policy.
- Bundle policies: If you have other policies, such as auto policies, bundling them with homeowners insurance may reduce the cost.
- Enhance home safety: The installation of security systems or storm shutters can reduce premiums.
Managing mortgage insurance problems
If mortgage insurance is a hurdle, consider these alternatives:
- Make higher down payment: Strive for a 20% down payment to avoid PMI.
- Piggyback loans: Utilize a second mortgage to finance a portion of the down payment, thus eliminating PMI.
- Specialized loans: Look at government-insured loans such as VA or USDA loans, which do not need mortgage insurance.
Alternative Mortgage Options
- VA Loans: No down payment and no mortgage insurance are required for veterans and active duty military.
- USDA Loans: These are loans for rural areas and provide 100% financing with no mortgage insurance5. Low Down Payment Programs Some of the lenders provide low down payment alternatives without PMI, including Bank of America’s Affordable Loan Solution, which has only 3% down and no PMI.
Not having insurance can be a major obstacle to mortgage approval, but there are ways to overcome them. By knowing the kinds of insurance involved and looking into alternative mortgage programs, prospective homeowners can successfully overcome these challenges. Through either finding affordable homeowners insurance or using specialized loan programs, homeownership is achievable even when insurance-related obstacles are present.
