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During all the excitement while finding a home to buy, no doubt during the process you’ve been working with a VA approved lender who explained the process and helped you choose the proper VA loan that meets your needs. Your completed loan application and credit report were reviewed along with receiving some paperwork helping you to estimate the amount of money you’ll ultimately need to bring to the closing table. Yes, the VA loan doesn’t require a down payment so you can scratch that amount off your list but there will be other charges, including money needed for an insurance premium. What do you need to know about insurance and how it relates to VA loans?
Insurance Minimum. When you attend your closing and review your settlement statement, the amount of your premium will be listed and you’ll be asked to provide a paid policy in force for at least the coming year. In addition, you’ll establish an insurance escrow account, where you will deposit monthly premium payments that will go toward paying the renewed insurance premium when due one year later. All lenders require a policy to be in force at the time of closing or the loan simply cannot close.
How much coverage do you need? At minimum, you’ll need to cover at least the amount of the existing mortgage or the replacement cost of the home. Your replacement cost will be determined by reviewing the appraisal report, which will make an estimate on how much money it would take to replace the home during a major hazard such as a fire.
Who Gets Paid. The VA lender needs their collateral protected with the insurance policy and besides the minimum amount of coverage required, the policy will specify who gets paid. The policy will state that the mortgage lender is named as the payee and will provide the mortgage company with what is known as the “mortgagee clause” which is the legal wording of the payee and also applies to anyone the lender sells the mortgage to. If the home is destroyed, the lender receives the amount due according to the policy and anything above that will go to the property owner.
What’s Covered. Overall, damage to the property is covered but you need to have more than just coverage for hazards such as wind, fire or hail. What if someone gets hurt on your property or a tree of yours falls onto your neighbor’s house? You need liability coverage to protect you in case of a claim against you as a result of your property. Liability coverage is an option, the lender won’t require it, but you need it. Appliances, permanent fixtures and personal property are also optional coverage and the more you cover the more the premium will be.
It’s important to note there that flood insurance is not a part of a standard homeowner’s policy but if the property is located in a flood zone, the VA lender will require an additional flood insurance policy be in force at the settlement table.
Deductibles. A deductible is the amount the homeowner must pay first before the insurance coverage kicks in. Just as an automobile policy might have a $500 deductible for a collision, so too does a homeowner’s policy have a deductible. The greater the deductible the lower the premium. Most VA lenders do have a maximum allowable deductible and a common maximum is one to two percent of the mortgage amount and sometimes the lender puts a dollar cap on the deductible, say $5,000.
Insurance coverage should be compared with as much vigor as when you searched for a VA lender. Coverage types, premium amounts and even the solvency of the insurance company are important. Work with your insurance agent to make sure you get the optimum amount of coverage and that if a claim is ever made, your agent is there to help.