Credit scores are not the only deciding factor when getting approved for a home loan, having insurance on the home being purchased is just as important. The lender will require proof of insurance on the home before closing and will have a list of requirements that the policy must meet. In addition, the insurance carriers have become much stricter on their policy writing and they very likely will also have requirements and inspections that your lender will not. This is why shopping for insurance as early as possible in the financing process is important. It provides time for additional inspections, repairs, reviews, or renegotiations and prevents road bumps along the way. The Florida insurance market has drastically changed in the past 6 months and it is important to understand how these changes will impact both prospective buyers and existing homeowners.
The Florida Office of Insurance Regulation approved early cancellation and nonrenewal of thousands of policies with carriers that are or may be in hazardous financial condition. It is intended to bring financial stability to Florida’s property insurance market, as Florida carriers posted their worst financial performance in decades last year, a combined $1.57 billion in losses.
More financial instability is likely ahead for Florida’s insurers. Coinciding with the beginning of hurricane season is the renewal period for reinsurance, extra coverage insurance carriers purchase to ensure they can pay claims. Reinsurance costs make up a significant portion of what homeowners pay through their insurance premiums, and depending on how reinsurance is priced this year, homeowners could see more increases.
Why is the Florida Insurance Market so unstable?
Two hurricanes that slammed the state—Irma in 2017 and Michael in 2018—generated claims with an estimated cost of about $30 billion. The cost of reinsurance, which carriers take out to cover some of the risk in the policies they sell, is swelling. And most notably, excessive attorney fees for litigation over insurance claims due to non-essential roof-related claims. The industry is in a panic because it is losing so much.
How does this impact existing homeowners?
As homeowner’s policies are starting to renew, these rate hikes are taking effect and lenders are mandated to pay the renewal bills that they receive from the insurers. Both the insurance company and the lender are required to notify the homeowner of the annual premium for that year.
If you escrow your insurance (and your taxes for that matter), the lender is basing your monthly mortgage payment off of whatever the current year’s bill is. So for example, if it is $1200 per month, $100 per month of your mortgage payment is to cover the next year’s bill. With these significant rate hikes, lenders are forced to pay the higher bill on your behalf, but they don’t have the adequate funds to do so, which causes a shortage in the escrow account. If this happens, the lender will notify you in writing of the shortage. They will give their calculation of how much they are short for this year’s bill AND how much more they need to collect from you over the next year to make sure that next year’s bill isn’t short again.
It is highly recommended that if you start planning for an increased insurance policy/mortgage payment in the coming year.
How does this impact existing new homebuyers?
Because of this instability in the market, the insurance carriers that continue to operate in Florida have become much more stringent on the homes they will insure to mitigate their risk. This means that there are far less options for homebuyers shopping in the market, and there may be no options at all depending on the condition or features of the home. For example, carriers used to insure homes that had a roof of 20-25 years old, and most recently many changed that guideline to just 10 years.
When should home buyers look for insurance?
It is imperative that home buyers reach out to insurance companies to get a quote as early on as possible and determine what is required to have a policy written. Many insurance companies are requiring specific inspections in order to approve a new policy, which will take additional time and cost. Once you have your insurance quote, have your lender review it right away to insure it is adequate coverage for financing. Also, keep in mind that insurance companies are inundated with new and existing clients that need to have their insurance needs addressed. This is creating extended turn times with the processing of your quote request, oftentimes up to a week right now. The start of hurricane season will also compound these issues, as insurance carriers pause writing all-new policies whenever there is a named storm out in the Atlantic.