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A Glossary
     Where to look for homes in your price range: Graphs: Graphs
     Homeowner's Insurance: Current Difficulties
     Why you should work with a local Loan Broker

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     Price Range and Pre-Approval

Homeowner's Insurance: Current Difficulties

As of the time of this writing, Fall 2002, there is a serious issue in California (and elsewhere) relating to Homeowner’s Insurance. It can affect buyers and sellers, as well as homeowners who are not selling. The issue is mold. Insurance companies are fearful of run-away liability in this area of increasing public concern. This is especially true in California, which has the reputation of being the most litigious state in the nation. The information that follows is general in nature, the specifics varying from company to company. Also, details change as the situation continues to evolve.

The information below notwithstanding, from what I have been able to determine, Homeowner’s Insurance of some sort is available in (nearly?) all circumstances. It may be hard to find, it may cost more than conventional coverage, and the policy provisions may or may not provide the customary degree of protection. Nevertheless, I’m told it is out there.

1) A number of major insurance companies have withdrawn from the California market altogether, notifying their existing customers that their policies will not be renewed after the end of the current policy term. Other companies are continuing to renew existing policies, but are not writing new policies.
2) Two claims by a policyholder within a three-year period can result in the non-renewal of an existing policy. This can be true even where the policyholder decided not to proceed with an actual claim, and the insurance company paid out no money. Further, a formal conversation with an insurance agent or a company representative about a loss is recorded as though it were an actual claim.
3) A policyholder’s loss from a car burglary, even where the burglary occurred off-premises, is covered on their Homeowner’s Policy, and therefore counts toward the two-claim total.
4) A single water-related claim can result in the non-renewal of an existing policy.
5) Buyers are likely to have difficulty obtaining insurance through normal channels on a property where there has been a water-related claim within the previous five-year period.
6) When a buyer applies for Homeowner’s Insurance the following are taken into account: the claims history of the subject property, the claims history of the buyer as it relates to Homeowner’s or Renter’s Insurance, and the credit-worthiness of the buyer. A buyer who has made two Renter’s or Homeowner’s Insurance claims in the previous three years, or who has less than very clean credit, can encounter difficulties in obtaining Homeowner’s Insurance.
In short:
A homeowner can find their existing insurance policy will not be renewed. A buyer can find that they are in contract to purchase a property with a claims history that effectively closes the normal channels for obtaining insurance. A seller can find that they are in contract with a buyer whose claims history or credit history severely limits that buyer’s choice of insurance carriers.

Until there is an industry-wide resolution that meets with the approval of the state legislature and/or the California Department of Insurance, the issue will persist. Even after that however, it is likely that insurance companies will be more selective than in the past as to the properties and persons they are willing to insure.

Meanwhile, there are a few things that you can do:

If you are a homeowner, you should consider carefully whether a covered loss is worth pursuing with (or even mentioning to!) your insurance company. Also, consider raising your policy’s deductible amount to the highest limit allowed by your mortgage lender (typically $500 or $1000, depending on the lender and the loan amount).

If you are buying a home, try to find out as early as possible about its claims history so you will know where to look for insurance. Also, be aware that your own claims history and credit-worthiness will be factors. Lastly, as suggested above, consider selecting the highest policy deductible amount allowed by the mortgage lender.

If you think that you may be buying a home in the future, consider getting Renter’s Insurance now from a company that writes Homeowner’s Insurance for their existing Renter’s Insurance policyholders. There will be requirements as to the minimum length of time you must have been covered under the Renter’s Insurance policy.

If you are selling a home, if possible, determine ahead of time whether the buyer is likely to encounter difficulty in obtaining insurance.

For both buyers and sellers, appropriate provisions in the Purchase Agreement can be of help in establishing each party’s rights with respect to the insurance issue, and in specifying procedures to be followed in different circumstances that may arise.

I will continue to monitor the insurance issue as it develops and will post information here about any substantial changes.

Nacio Brown
Added October 2002 Click here for Printer-Friendly Version

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Why you should work with a local Loan Broker

1) The loan broker represents your interests, not the Bank's interests.
2) You will probably get a loan better suited to your needs.
3) You may very well get a lower interest rate
4) Working with a local loan broker may make your offer stronger.

Unless you have a very close personal relationship with a bank or a credit union, I strongly recommend that your work with a local loan broker for financing. The experience will be completely different than working directly with a bank. When you go into one of the commercial banks to ask about a mortgage, the bank employee who assists you is not generally involved in the loan process beyond giving you the forms you need and answering some of your questions. That's usually it. You will have little or no direct contact with the department that actually processes your loan. Most important, there will be no one who directly represents your interests, as opposed to the bank's interests.

When you work with a loan broker, things are very different. First of all, they represent you. They don't get paid unless you get your loan. And, dealing with a loan broker usually costs you nothing extra: just as airlines and hotels pay travel agents, the banks pay loan brokers out of fees you would pay anyway if you dealt directly with the bank.

It is unlikely that any bank employee you encounter will be as knowledgeable about the nuances of the various loan types as a good loan broker. Nor is it likely that a bank employee will be as willing to spend the time needed to explain to you the various loan programs to make sure you get the specific loan that best meets your needs. Furthermore, even if a bank employee were as knowledgeable, it is unlikely that any one bank has available as broad a range of loan program types as does a good loan broker.

It is difficult or impossible for you to effectively comparison-shop the loan rates of commercial banks. There is just a practical limit to the number of banks you can contact. Furthermore, interest rates fluctuate constantly. By the time you have checked the last bank on your list, the rates at the other banks could well have changed. What you need is someone who can easily monitor interest rates for you. A loan broker can do this for you, and can do this on a scale you couldn't approach on your own. This is because, in addition to the well-known commercial banks, loan brokers are in contact with various mortgage banks you are not likely to be aware of.

One very important thing is that the loan broker you work with be local. At any given moment in any good-sized real estate brokerage, there is at least one agent* walking around wanting to tear their hair out, muttering that they will never again become involved in a transaction with an out-of-area loan broker. This is because problems can come up with out-of-area loan brokers that would never come up with local loan brokers.

The first issue is this. The local real estate agent community is the largest single source of business for active local loan brokers, and good loan brokers give great service to the agents they know. Repeat business depends on it. However, when things are busy, as they usually are, and I call an out-of-area loan broker with a question or a problem, my call is the last call that will be returned. The out-of-area loan broker has no stake in keeping me happy, as they know that there is little chance of their ever working with me again. Their local real estate agent clients always come first.

A second issue is that many knowledgeable local appraisers don't have time to work with out-of-area loan brokers. The local loan brokers give them all the work that they can handle. This means that the appraiser who is employed is likely to be from out of the area as well, and therefore less knowledgeable about local real estate.

A third issue is simple. A familiar, local loan broker's letterhead on your pre-approval letter is reassuring to the agent representing the seller. An unfamiliar, out-of-area loan broker's letterhead can cause concern. As a buyer, especially if your offer is one of several, you want to muster every bit of strength possible.

There is really no good reason to work with an out-of-area loan broker, as it is extremely unlikely that they will have available any loan program or loan rate unavailable to local loan brokers.

Finally, what do I mean by "local"? For the areas in which I work, I mean a loan broker based in the Berkeley/Oakland-area. I have worked with several highly regarded local loan brokers for many years and am always glad to provide my clients with referrals.

* Me, on more than one occasion.

Nacio Brown

Added March 2003 Click here for Printer-Friendly Version

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