What’s with all the different types of insurance I have to buy when I purchase a home?

Affectionate couple showing paper question mark and looking at c

Ok, so, you didn’t set out to become an insurance expert – all you wanted to do was buy a house, after all. Yet, in the process, you ran up against at least four different types of insurance – and these are just the mandatory policies.

We are willing to bet that you never dreamed you would learn so much about insurance as you have during the home-buying process. From PMI to hazard insurance EVERYONE has their hand out, wanting to make sure their interests are covered.

Think title insurance is frivolous?

A Utah couple put their home on the market and quickly found a buyer. Escrow was opened and the title search was ordered. During the process, the title company discovered a lien against the property, which happens frequently. What happened in this case is when the homeowners originally bought the home, the sellers lent them some money for the purchase. This loan created a lien against the property.

The escrow company contacted the original homeowners (the originators of the loan) and informed them that the folks they lent the money to were selling the home and, thus, paying off the loan. The lien could be removed, right?

When dealing with reasonable people the answer would be yes. Unfortunately, the original homeowners turned out to be quite disagreeable and refused to take the payment in full for the money they lent. They offered no explanation.

The sellers worked overtime, trying to get the uncooperative former owner to accept the loan repayment. When the closing date came and went, the buyers for their home ― a family of five ― were forced to move into a weekly apartment because they’d already given notice to their landlord.

Finally, the original homeowner came forward and demanded more money than what was owed. To get their buyers out of the weekly rental and to move on with their own lives, the sellers paid the former owner more than what they owed.

There is a moral to this story, which I’ll get to in a minute. First, let me explain what title insurance is and how it works. When a home goes under contract, the lender demands a search of the home’s title to determine that the homeowner is truly the owner of the property and that nobody else has a full or partial claim to it. The title search will also reveal outstanding judgments or liens against the property, information about unpaid taxes and many other issues.

After the title search, the title company will release a summary of its findings, typically called an abstract of title or a preliminary title report, and an opinion about the validity of the property’s title.

If the lender sees anything negative it will refuse to issue the funds and the home will not close until the problem is cured. If, on the other hand, the researcher validates the title, the lender will proceed, with the requirement that the buyer purchase an insurance policy to protect it against any claims that weren’t found during the research. This is commonly known as the lender’s title policy, although there is also an optional owner’s policy that protects the new homeowner as well. The lender’s policy only protects the lender, even though it doesn’t pay the premium, the buyer or the seller does.

So, the moral of the original story about the Utah homeowners is that home sellers should order a title report before actually going under contract with a buyer. You never know what might turn up and most clouds on title take time to remedy – time you won’t have once there is a closing date.

Nobody likes PMI

Private mortgage insurance (PMI) has been in the news a lot over the past few years. FHA raised and then lowered the costs of its premiums (which they call the Mortgage Insurance Premium or MIP) and that hit the headlines. Then the advice columns on how to get rid of PMI started making the media rounds. American homeowners try desperately to rid their house payment of the PMI premium.

PMI covers only the lender and will kick in if you default on the loan. It is required for most loans when the buyer pays less than 20 percent of the purchase price for a down payment. This is, in a nutshell, the price borrowers pay for low down-payment loans. Without it, you’d have to come up with 20 percent of the purchase price of the home. So, it’s not entirely “useless” after all. Annoying, yes.

Let’s talk about homeowner’s insurance

Homeowner’s insurance is another lender-requirement but the homeowner also benefits in the case of a claim. Hazard insurance is a part of a homeowner policy.

Homeowner’s insurance coverage varies from the basic theft, weather damage and fire to more- costly coverage including that for earthquake or flood damage. The lender will let you know which basic coverage you will need to purchase.

The whole topic of insurance is confusing to most folks and when you are trying to cover such an expensive investment the only counsel you should obtain is that of an experienced and knowledgeable insurance agent.

Life is tough when your credit score stinks, so let’s fix it

 

Whether it was a foreclosure, short sale, deed-in-lieu of foreclosure, a job loss or just plain irresponsibility, there are some steps you can take to get your credit score back into the range where it is attractive to mortgage lenders and you can finally buy that house.

Where does my credit score come from?

Credit scores range from 300 (the worst) to 850. Although a score of 700 will get you lower rates and more credit opportunities than lower scores, 760 and above is considered prime.

If you’ve ever ordered your credit report you did so from one or all of what are commonly known as “the big three” credit reporting agencies: Experian, TransUnion and Equifax.

These agencies compile massive amounts of financial information obtained from companies from which Americans have obtained credit in the past. From this, they determine each person’s payment history, the length of the person’s credit history, the various types of credit he or she has and the amount of credit debt held.

When the big three agencies turn their information over to Fair Isaac Corporation (FICO) or, in some cases, Vantage, it’s fed into a complicated formula and out pops a three-digit number that pretty much rules your financial life. Thankfully, your credit score adjusts, according to how risky you appear.

Pay on time

The best way to repair your credit score is by paying your bills on time, every month. Yes, it sounds simple and it is the responsible thing to do, but it’s also one of the quickest ways to pump your score into a more acceptable range. Don’t believe us? According to a study conducted by Experian,100 percent of super prime consumers and 97 percent of those with prime credit have no late payments on their credit reports.

Furthermore, The Raleigh Area Development Authority says that a person with a 707 credit score can raise it 20 points, just by paying bills on time for one month.

Manage the plastic

Your use of credit cards may be the culprit when your score is at rock bottom.

First, credit scoring agencies look at the age of your credit. New credit, such as opening new credit card or department store accounts, makes them leery. Just what will you do with all this new-found credit? Since they don’t know, you become a higher credit risk and take a 10 point ding on your score.

High balances make you appear risky as well. If your cards are maxed out you may lose up to 70 points on your credit score.

Don’t close your credit card accounts, just pay them on time. Consumers with no credit cards or installment loans look risky (it’s that fear of the unknown again) and tend to be penalized with lower scores. Besides, closed accounts still show up on your credit reports and may still affect your score.

If you have the money in your budget, another quick way to raise your score is to pay down high credit card balances. Try doubling your payments for a few months or at least pay a payment and a half.

If you build it, you can buy it

Many Americans didn’t do anything to deserve a low score other than to have never used credit. To credit scoring agencies, these people are, again, unknown entities. How they will use credit when they receive it is a mystery and therefore makes them a credit risk in the eyes of the agencies.

Unlike the folks that need to slow down on their credit card usage, you need to obtain a card, use it and pay the balance on time. Ensure that you obtain a card from an institution that will report your responsible use of credit.

To make it easy on you, we’ve compiled this handy, fix-your-credit checklist:

  • Order your credit reports from each of the big three agencies to determine where you stand
  • Dispute any errors you find on your credit report. Some shady credit counseling companies may suggest you dispute everything on the reports, which may do way more harm than good. The Federal Trade Commission offers advice on how to file disputes on its website.
  • Pay all your bills on time, every month
  • Pay down your credit card balances. If you can only afford to pay one at a time, pay department store cards first, if you have them, otherwise, pay off the one with the highest balance first. Aim to get the balances within 30 percent of your credit limit.
  • Use old credit cards that you haven’t used lately to keep their histories active. Remember, old credit is worth more than new credit when it comes to your score.
  • Obtain a secured credit card if you have no credit history. Use the card for small purchases and pay the balance on or before the due date.
  • Consider obtaining a small loan if your credit report lacks an installment loan history. Ensure that the lender reports to all three agencies.
  • Ask creditors to re-age your accounts. This might be challenging but if even one creditor agrees to do so your score may improve dramatically.
  • Ask the credit card companies to increase your credit limit