Many in the dark on homeowners insurance coverage and pricing

By Sabrina Karl

Although the vast majority of homeowners carry homeowners insurance (if you have a mortgage, it’s required), only about a fifth of homeowners have reviewed their policy to understand what it covers, or have shopped around for a good policy price.

A new ValuePenguin survey of 1,849 homeowners with homeowners insurance found that almost half (47 percent) said they don’t know what their policy covers, and 18 percent went as far as saying they have never reviewed their policy.

Meanwhile, although 64 percent reported they review their policy annually, only 71 percent said they feel confident in their understanding of what’s covered.

A common misconception turned up by the survey is the belief that flood damage is covered. One in three respondents (34 percent) believe their policies cover flooding, even though most policies do not. Among millennials, almost 50 percent have this misconception.

Many homeowners may also be paying more than they need to for coverage, since only a fraction are shopping around for the best rate. Approximately a fifth (21 percent) said they researched rates, either by comparing online quotes or working with an independent insurance agent.

So how are most homeowners choosing their homeowners insurance provider instead? More than a third (36 percent) simply opened a policy with their auto insurer, while another 36 percent chose who was recommended to them by friends or family (15 percent), their mortgage lender (12%), or their realtor (9%).

While homeowners insurance can seem like a simple checkbox to mark when you buy your home, and then keep current once a year, policies can range widely in terms of perils covered, deductibles required, and maximum payouts allowed, as well as rates charged. Doing your homework to choose the best coverage, and for the best price, is a savvy homeowner move.

Can I get a mortgage without a credit history?

By Sabrina Karl

When you apply to a lender for a home mortgage, one of the most important things they consider is your credit score. But what if you don’t have a credit history? Can you still get a mortgage?

Your credit report rates your worthiness to receive new credit by scoring the length of your history with credit cards and loans, along with your pattern of on-time vs. delinquent repayment. But for consumers who have shunned credit cards and who have never taken out a car or home loan, there is little or no information to inform their credit score.

If you’re in this situation and want to buy a home, your path will be a little trickier, or at least more cumbersome. But it’s not impossible to find a mortgage and a lender that will qualify you using nontraditional credit evaluation.

There are two main paths forward for homebuyers without a credit score: apply for an FHA mortgage or find a lender that does “manual underwriting”.

FHA mortgages explicitly allow for applicants who have a thin or non-existent credit file. In lieu of a credit history, FHA underwriting can evaluate your history of paying rent, utility bills, and insurance premiums. It also offers the ability to buy a home with a lower down payment of 5 percent or even less.

But FHA loans come with certain fees in exchange for their easier qualification terms and government backing. So if you have more than a 5 percent down payment available, you may instead want to look for a lender that offers manual underwriting.

These lenders aren’t common, but check smaller banks, online lenders, and local credit unions for this option. And be prepared to provide documentation of 12 months’ payment history for your rent and your utility, phone, and insurance bills.

Does the first-time homebuyer credit still exist?

By Sabrina Karl

One of the consumer benefits that emerged from the Great Recession was the first-time homebuyer credit. Enacted by the Bush administration in 2008, the program provided a tax credit to Americans buying their first home.

Part of the Housing & Economic Recovery Act, the tax credit was available to first-time buyers who purchased their home in 2008, 2009 or 2010. Although the credit has since been retired, you may still be in luck if you qualified with a home purchase during those years and neglected to file the credit, or you became a first-time buyer later.

If you closed on your first home between April 9, 2008, and September 30, 2010, you could still qualify. A number of variables come into play, so the best way to determine your eligibility is to consult a tax accountant.

You’ll want to consider a few things before going down that path, however. For instance, on first homes purchased during the eligible 2008 dates, the credit is not in fact a true credit, as it requires repaying it with your annual tax return for 15 years after the home’s purchase. So someone claiming the maximum $7,500 credit would repay $500 per year over 15 tax returns.

In 2009, the Obama administration revised the program slightly, upping the credit to an $8,000 maximum and forgiving its repayment for those living in the home as their primary residence for at least 3 years after taking the credit. So if you bought during 2009 or 2010, but sold or moved within 3 years, you’re out of luck.

For first-timers who bought after the program’s 2010 sunset date, you may still have options. Many state and local governments offer their own programs for first-time buyers, so researching what’s available in your area could turn up other financial benefits.

What are mortgage points and should I pay them? →

By Sabrina Karl

One of the most confusing mortgage choices is whether to pay points. It doesn’t help that the term is used two different ways, or that the right answer varies by situation. But the good news is that you can boil your decision down with a simple math calculation. 

A “point” refers to one percent of your loan amount. So on a $200,000 mortgage, one point equals $2,000. You also need to be aware that lenders quote two kinds of points. Origination points are a fee you pay the lender for their services, and you may or may not be able to negotiate it.

But discount points are different, and are the ones borrowers find themselves dithering over. A discount point is a pre-payment of interest at the time of closing in exchange for a lower mortgage interest rate. It allows you to “buy down your rate”.

Lenders often let you pay one to three points, but we’ll use an easy one-point example. Opting to pay a point at closing typically lowers your mortgage APR by about a quarter percent (though lenders vary). So for a $200,000 mortgage with a 30-year fixed rate of 3.75 percent, paying one point, or $2,000, could lower your rate to 3.50 percent, which would drop your monthly payment from $926 to $898.

Now divide the cost of the point ($2,000) by the monthly savings ($28) to see how long it will take to break even. In our example, it would take 72 months, or six years, to earn back your $2,000 investment. Expect to stay in your home longer than that? Then buying points makes good sense.

Of course, if you can’t afford to bring more money to closing, or you have a higher-priority use for your funds, a no-point mortgage will be your own smart mortgage choice.