Q: We closed on a mortgage with a big box lender for a condo that required flood insurance. We purchased a policy in the amount of the mortgage, which is what was required.
Now, the lender has contacted us to say they are requiring us to buy a policy for 100 percent replacement value that comes to almost three times the amount of the mortgage they carry.
The lender actually “lied” on the phone and told me it is because the National Flood Insurance Program (NFIP) requires it. I called NFIP and they told me that they do not require this level of flood insurance. They said they leave it to the discretion of the individual bank.
At the closing, the lender only required us to carry flood insurance in the amount of the mortgage and now that the loan is “signed, sealed and delivered,” they are forcing us to increase the amount we’re carrying.
I feel this is fraud. Is there any way to fight it? Please help.
A: Let’s start out by saying that requiring you to carry a higher level of flood insurance may not rise to the level of fraud. I haven’t seen your loan documentation, but I’m sure there is a line in there that allows the lender to require you to increase your homeowners insurance or flood insurance coverage upon request to a certain level.
Read the fine print of your loan and see what it says regarding lender-required coverage. If you find legalese difficult to interpret, please talk to your real estate attorney and ask for help in evaluating your options.
It’s possible that your lender made a mistake initially, and is now trying to correct it. It’s also possible that your area’s flood status has recently been redesignated, requiring an upgrade of all flood insurance policies. (Flood area maps have been redrawn through the whole country in the last couple of years.)
With the help of your attorney, you may be able to negotiate a compromise with your lender regarding the flood insurance you’re being required to carry. But you’ll need to know more about what your loan documents say before that can happen. If you truly feel as though this is being required for no reason, then your attorney can advise you on your next steps.
Finally, make sure you understand the difference between insurance coverages. Some people will purchase the minimum amount of homeowner’s insurance coverage and if a disaster strikes, they are way under-insured. Another mistake some homeowners make is not knowing and understanding the different kinds of insurance policies.
Just about all homeowners should buy and have insurance coverage to cover damage to and rebuilding of their homes. In addition to that coverage, homeowners should have insurance to cover their personal effects and contents in their home.
However, all insurance policies have coverage gaps. If you live in the west coast of the United States, you might want to add earthquake insurance to your homeowners insurance coverage. If you live in an area prone to flooding, you’d want to have flood insurance.
As a homeowner, you need a good insurance agent to help you sort the coverages and your choices. You probably don’t need earthquake insurance if you live in the east coast but should buy flood insurance if you live near a stream or river.
If you understand these choices, you’ll be in a better position to talk to your lender and understand their request.
Since you’re buying a condominium, most condominium owners rely on their condominium association for insurance coverages. Usually condominium owners only purchase insurance to cover their personal effects and the association acquires insurance to cover the building – and that coverage should be for the replacement value of the buildings.
With the drop in real estate values, there are places in the United States that the cost of buying a foreclosed home is far lower than the replacement cost for that home. If you love your home, you’d want to make sure that if there is a great casualty, you’d be able to rebuild that home and continue to live in your community.
Update: My correspondent wrote back the following: “Thank you. I am sure you are right and that there is something in fine print about required coverage. It is just the way that this has been handled.
“Even when we called the loan officer who handled the closing to ask about the letters requiring the increase, he had no knowledge about any of it! And he does mortgages for our lender all day long! It has been incredibly frustrating trying to get any kind of a straight answer from any of our lender’s ‘customer service advocates.’ I am sure that it will be impossible to fight the ’big guy.’ The little people are always the losers.
Again, I just wanted to thank you for your kind response.”