Anyone who is — or is looking to be — a homeowner in California knows that insurance in our state is “a situation.” Nestled between restrictive state regulations, rising building costs, and natural disaster occurrences, many insurance carriers are pulling back on coverage or placing so many hurdles to obtain it that some folks are calling this a crisis.
To date, there’s been much press around this: why we are here and what we can do about it. I strongly urge everyone to educate themselves on this subject because if you live here, it affects you in one way or another. This article instead serves to outline a bit less covered topics: the mechanics of how it impacts borrowers on the day to day.
If you have a mortgage, your property is required to have hazard insurance coverage. The idea is that the insurance provider will help rebuild structures should something disastrous happen. Your mortgage holder is listed on your policy in your “Mortgagee Clause,” which tells the insurance company who to contact if something has happened and when you are trying to cash a check to repair that same something. As a homeowner, it’s your obligation to ensure your insurance is up to date — and servicers typically require reverification annually.
My advice is to keep your “Replacement Cost Estimator” (RCE) handy — as mortgage holders cannot require you to have coverage over this figure. Essentially, the RCE is a calculation of what the insurance company estimates it costs to replace (a k a rebuild/repair) your property to a similar condition. Not only is this good to know so you’re not paying for more than you need, but it’s also important to be sure it’s in line with current building costs.
And what if your insurance lapses? Well, your mortgage company could “force place” insurance — wherein you are paying for coverage they chose. And if you are in a flood zone? Then you’re required to have the insurance impounded in your monthly payment, meaning there is no option to pay it separately as many folks do for standard coverage.
And what about those payments being higher now than they used to be? While not great for your pocketbook, the good news is that the mortgage holder cannot change the terms of your loan once you have it just because the premium went up. Where it is super impactful is if you are looking to qualify to buy a new home, or refinance the property you currently own.
Premium payments are calculated in your debt-to-income by taking the annual premium(s) divided by 12 for each month of the year that it would cost to pay in full. Using the adage that every $700 in monthly debt coverage equates to about $100,000 in real estate finance, it’s easy to see how rising premium costs impact qualification. This means you might not get the original loan you planned for, or even be able to get one at all.
We have a long road ahead to figure out the insurance situation in California. We need to look at what it means to be an admitted or non-admitted carrier, and if these policies support the people’s needs. We must admit that the amount of devastation we’ve been through is not cheap to rebuild, and that these types of disasters are becoming more frequent. It will be important to consistently educate, use your voice, and be reasonable and curious about what we can do to mitigate risk for all.
Austin Lampson is a licensed mortgage professional and branch manager of Origin Point Mortgage. She has spent the last quarter-century helping her clients balance math and emotion to achieve their financial goals. Reach Austin at (805) 869-7100, austin@austinlampson.com, or visit austinlampson.com.
