Pay Dirt Series – Navigating the Challenges of Fire Insurance

It is a condition of most mortgages, other than bare land, that there be fire insurance in place.  This makes sense, because the lender’s security is made up of both the land and the buildings, so if the buildings burn, the lender has lost some its security.

A couple of challenges arise with insurance:

In the summer wildfire season, many insurers will not underwrite any new policies if the properties are within a certain distance of the affected area.  For this, there is little that can be done.  The files usually have to wait for closing until the insurers are once again comfortable issuing new policies.

Insufficient insurance can be an issue.  For example, the lender may require replacement cost insurance, but the borrower has less comprehensive insurance in place.  In these cases, for the deal to close, the borrower will need to have the policy amended to comply with the lender’s requirements.

Monthly payments.  Some borrowers are on a monthly payment plan for their insurance.  This means that they could stop paying after the mortgage closed, leaving the lender to place its own (very expensive) insurance on the property.  Because of this some lenders insist on a fully paid annual policy, however its worth asking the lender for an exception to allow for monthly payments.  You’ll often get the exception.