Down Payment Insurance--A New Option for Homeowners

By Floyd Arthur

Following the collapse of the global economy in 2008, millions of U.S. homeowners saw the value of their homes decline. Many who bought at the top of the market found themselves unable to refinance their high-interest mortgage loans or sell their homes for more than a fraction of what they owed. The foreclosure crisis followed, leaving millions of American families in dire financial straits. Far too many have still not recovered as of 2016.

Now a Dallas based insurer, ValueInsured, has introduced a program that may help protect some homeowners from the same fate. Known as +Plus, it is “down-payment Insurance” that allows homeowners to recover a portion of their financial loss in the event home prices decline. The coverage comes with a number of limitations and strings attached, but for those who stand to lose a substantial amount of money if prices plummet again, it may be worth a look.

What Is Down Payment Insurance?

As described by ValueInsured, down payment insurance reimburses homeowners for their down payment (or a portion of their lost equity) if they sell their home after two years but before seven years from the purchase date. It will not help people who are upside-down on a current mortgage, but it does offer some protections for home buyers today.

Down payment insurance is not mortgage insurance. Mortgage insurance protects the lender in the event the homeowner defaults. Down payment insurance protects the buyer in the event home prices decline.

What Are the Limitations of Down Payment Insurance?

Down payment insurance has some limitations. One of these is the aforementioned “seller’s window” of between two and seven years. If you sell your home before two years have gone by or after seven years, the coverage does not apply.

Other limitations include:

• Down payment maximum: The maximum amount of down-payment coverage available is 20 percent of the purchase price. So, if you buy a $200,000 home and put $60,000 down, your insurance will still only reimburse you $40,000, or 20 percent of the price of the home.

• Coverage maximum is no more than the purchase price minus the sale price: Regardless of the amount of your down payment, the coverage is limited to the purchase price minus the sale price of the home. So, if you put a $40,000 down payment on $200,000 home and then sell it for $185,000 after three years, your insurance will reimburse you $15,000, not the $40,000 you put down.

• Loss of equity must be tied to a decline in home prices in your state: Perhaps the most concerning restriction in the +Plus program is the condition that any decrease in the value of your home must be tied to a decline in the Federal Housing Finance Administration Home Price Index in your state. Thus, if your neighborhood or city experiences a decline in housing prices but the state HPI is unchanged, you will not be reimbursed for lost equity if you sell.

Additionally, the home must be owner-occupied during the entire coverage period and the sale of the home must be to an unrelated third party. No leasebacks are allowed. The insurance also does not cover the cost of improvements you made to your home, prepayments towards the loan balance or real estate fees and closing costs.

How Much Does Down Payment Insurance Cost?

Premiums for down payment insurance vary by state and the purchase price of the home. According to a blog post by Jack M. Guttentag in HuffPost Business, the cost for a $200,000 home with a 10 percent down payment in an “average” state is about $840, or 4.2 percent of $20,000, the maximum allowable claim.

Whether or not you qualify for or wish to invest in down payment insurance, protecting your home and your family is a must. Our experienced agents can help you sort through the various coverage options available to you and put together a comprehensive package that addresses all of your needs -- including insurance coverage for your business and automobiles. Call us at 516-292-3780 between 9 a.m. and 6 p.m. to set up an appointment for your business review. Or if you prefer, simply request a free consultation online now.