Loan Modification

Borrower?s payment increases by $500 a month ? and he has a fixed rate!

By Gina Pogol

A Philadelphia homeowner who had been paying his mortgage without incident for seven years was recently slapped with an ugly surprise when his lender decided to up his homeowner’s insurance coverage without his consent. Yes, the lender (which shall remain nameless here but you can read the story yourself) decided that maintaining coverage based on the property value would no longer satisfy it; instead it wanted the homeowner to place $1 million worth of coverage on a home he’d paid $180,000 for!

Why the discrepancy?  Well, it’s no surprise that home values have plummeted halfway to Hell, and that in many cases you could not sell a home for what it cost to build. In such situations, most lenders require a homeowner to insure for the home’s market value. But this lender wanted enough insurance to provide funds enough to rebuild the home exactly as it is regardless of what the property could fetch in a sale — and the home is a century old. Rebuilding it would be more like a restoration than a repair, hence the million dollar policy.

S0 the homeowner took exception to having his payment increased by $500 and sued the lender for violating the Real Estate Settlement Procedures Act (RESPA), winning $1,200, and the story continues.

If his loan had been with FHA, this would almost surely not have happened.

Here is what HUD has to say about hazard insurance coverage and FHA home loans:

“While HUD does not require (borrowers) to carry hazard insurance, the office does permit (lenders) to require it.” However, the lender must escrow the funds for hazard insurance if it’s required (meaning it must collect them on a pro-rated basis each month and then pay the premium each year).  When the lender escrows the insurance, it must renew the same type of policy that had been carried previously. So FHA lenders don’t get to arbitrarily change your home’s insurance coverage or impose expensive forced-placed policies on you.

Bloggers like me almost always point out the by-the-numbers savings as the main FHA advantage. But there are other protections that government-backed loans provide that private-sector lenders won’t. That has become a lot more apparent in these days of robo-signing, foreclosures and dirty tricks than it was in the past.

Full post as published by FHA Mortgage Guide on February 16, 2011 (boomark / email).