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INSURABILITY CHALLENGES

I’ve noticed that homebuyers often put off ordering their homeowner’s insurance policy until the week before closing. It is wise to investigate the insurability of both the home and the buyer as early as possible. That’s right, both the home AND the buyer need to be approved by the insurance company before they will issue a policy. If they feel that either the home OR the buyer is highly likely to result in expensive claims, they many not offer a policy. Without an insurance policy, the lender won’t lend the money and the deal falls apart. This is very rare, but it’s something to be aware of and you should do your homework ahead of time.

 

For the home, the insurance company is especially concerned about homes with prior water leaks or a history of claims. In regard to the buyer, the insurance company will be reviewing their credit history and also their history of claims in their prior residences, even if they were renting. There is something called a CLUE (Comprehensive Loss Underwriting Exchange) report that can be ordered on the home and the potential buyer ahead of time. If you are a buyer, talk to your insurance agent. If you are a seller, talk to your listing agent and they can help you order one.

 

Another reason to start early with the CLUE report is that by law, an insurance company can cancel your policy up to 60 days after you apply for the coverage. Here is the worst-case scenario: You buy a home and close escrow but then two weeks later you get a cancellation notice on your insurance because the home has a history of water damage. This means that you’ll have to get insurance from a company that specializes in high-risk homes, and their premiums can be very expensive.

BUT I’LL BE OUT OF TOWN…

Let’s say you are in escrow to buy or sell a property and the scheduled closing date is two weeks away. Then you find out you have to take an unexpected and extended trip out of town for business or family reasons. What to do?

 

You have several options. First, it is important to point at that your presence is not required ON the date of close of escrow. You actually sign your closing documents well before the actual day of closing. The buyer’s loan documents usually show up about three to five business days prior to the day of closing. Sellers can sign even before the buyer’s loan documents arrive, meaning it’s possible for them to sign a week or even two weeks prior to the scheduled closing day. The title company takes care of the actual recording of the documents on the day of close of escrow without your presence needed.

 

However, if the documents won’t be ready before you leave, there are two more options. One is to have the documents sent to you wherever you are at in the world. You’ll just need to sign them in front of a notary and ship them back (make sure the title company and/or lender approve of the notary first). If there isn’t enough time for that, then you could use a Specific Power of Attorney as a last resort. This grants someone that you trust the right to sign in your place FOR JUST THIS REAL ESTATE TRANSACTION ONLY. Usually this would be a spouse, though any trusted friend or advisor will do. This will need to be handled before you leave so plan ahead. You can either leave the signing up to your surrogate, or check in by phone or email to give it your verbal “OK” to what they are signing.

THE RETURN OF ALT-A?

If you haven’t heard the term, “Alt-A” before it’s because it’s a behind-the-scenes term that lenders use. Maybe you’ve heard of the terms “low-doc,” no-doc” or “sub-prime.” These are the loans most responsible for the real estate bubble and then crash of the early 2000’s. These loans were abused horribly to get people into homes they couldn’t afford with predictable results.

 

There is talk in the industry of bringing these loans back, but in a much different way than they were used in the past (so you can put your pitchforks down, at least for now). There is a small population of potential homebuyers who can’t qualify for a regular loan through normal underwriting. It could be a small business person who can’t show a net profit because they are plowing everything temporarily back into the business, or someone whose income fluctuates greatly from month to month or even year to year. These are people that can afford to make their house payment and are considered good credit risks by some lenders, but the “Alt-A” loan business dried up several years ago.

 

There are lenders that may be willing to lend to these borrowers again, albeit at a higher rate than they would to a regular W-2 wage earner with a 10-year history on the job. So if you are one of these types of people, check with your favorite lender representative to see if there is an option for you now even if you were turned down as recently as last year.

 

Now, if lenders start to encourage buyers to lie about their income again to take on a loan they really can’t afford (“liar loans”), then by all means get out your pitchforks and I’ll meet you at your bank with the tar and feathers!

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