Buying or Selling a Home/homeowners insurance for owner financing
QUESTION: I am providing owner financing for a house and have an addendum that the buyer must show insurance at closing and is required to have insurance for as long as my interest only loan to him is in effect. My wife thinks we should be the beneficiaries but I am not so sure since after closing, he owns the home. How would you advise? Regards, John
ANSWER: Hi John.
Thank you for your question. You are definitely right about the insurance. Every lender requires it, as it protects their interest in case of catastrophe. As far as you and your wife being beneficiaries...Lenders don't do that.
I am not an attorney and cannot provide you with legal advice on how you should write your contract. However, you are in a position to foreclose on your borrower if/when they do not meet your contractually agreed upon terms. As for what happens if the borrowers dies, that would depend on UT's laws, and your contract. If the borrower agrees to your being the beneficiaries, ask him verbally first, you could get lucky! And, then you could end up in a legal entanglement when he passes. Personally, I wouldn't recommend it.
A good thing to keep in mind is you are now a lender. Lenders don't want the house back. They want their loan/s paid off. UT law will govern how that is handled, ie., trust, probate, inheritance...
You may want to consider these resources: avvo.com and lawyers.com. Both have free access to on-line legal advice.
I sincerely hope that helps, John! Good luck!
---------- FOLLOW-UP ----------
QUESTION: After reflecting on you answer to my question, I realized that you thought my main concern was if the buyer died. Actually my concern is if the House was lost due to fire. Does that modify your answer at all. Again thanks for you advise. Regards, John
Thank you for the kind feedback, John. You're doing the right thing asking if any modification in my answer is needed. No modification, just underscore that you are on the right track with the Addendum regarding insurance. I assumed you meant home owner insurance, aka hazard insurance. As you know, the main coverage concern would be destruction by fire. You'll want to see the policy prior to close to ensure adequate loan coverage exists. NOTE: -Loan- coverage not value as value includes land, which still exists post-fire. You will want to ask your insurance agent to take a look at what the buyer presents.
However, if you meant mortgage insurance, that's a different animal. The best answer I can give you here is: Lenders require a borrower to have mortgage insurance when the buyers' down payment doesn't reach a certain threshold. The standard here is 20 percent down on a 'conventional' loan. The idea is the higher the down payment the less likely the borrower is to walk away from the mortgage payment and face foreclosure --where they would lose ALL of that down payment--. This thought is in tune with the 'lenders want loan re-payment, not the house' policy.
When the down payment is less than the standard, lenders will either build in their own backup system, if you will, by increasing the interest rate they charge -- the lower the down payment, the higher the risk and therefore, the higher the interest rate --, require the borrower to purchase mortgage insurance from a mortgage insurance company --the lender will choose and engage a mortgage insurance company for them--, or both.
Mortgage insurance is used -only- to repay the loan. This means the -only- beneficiary can be the lender. This is different from life insurance that -can- be used to repay the loan, in part because borrowers have control over the benefactor rights and can ace out the lender, stop the policy at will, or family members can litigate after death, etc.
It could get tricky trying to engage a mortgage insurance company when acting as a private lender versus an institution. And, there are only a handful of main players. I would suggest one start queries with either mortgageinsurance.genworth.com or mgic.com.
Please know it is not my intention to bore you with details <smile>. It is to ensure I have fully answered your question as these 2 types of insurance are often confused when one considers insurance that will cover the loss of a home. Loss by hazard is home owners insurance. Loss by lack of mortgage payment is mortgage insurance.
The upside in handling the transaction privately is you and the buyers can contractually agree upon most anything reasonable without it being the standard practice found in traditional contracts. Naturally, I would recommend an attorney review the contract to ensure a lack of loopholes or inconsistencies that could damage your chances of recovery if needed...The cost up front will provide peace of mind for years to come -and- possibly save you from financial devastation later.
Do not hesitate to let me know if I have not fully answered your question, John.