Ministry of Housing in conjunction with a number of private sector partners held a one night housing symposium and provided prospective homeowners with insights on owning a home. With this in mind I have decide this week to break my series on “Small Business Owners Insurance Needs” to look at the various insurance needs that arise out of becoming a homeowner.
In reviewing the loans approved by two local bankers, last week it was estimated that the average cost of a house in the Bahamas is over $112,000. This means that not many persons will be buying their homes cash. So in order to buy you will need a loan, a mortgage and this can be a scary proposition.
Your mortgage will probably be the most substantial and important financial commitment that you are ever likely to make. Not only will you owe tens or even hundreds of thousands of dollars to the mortgage holder but you will also be committed to paying back hundreds, maybe thousands of dollars per month and this commitment will be for a very long period of time, up to 25 years. Failing to meet your agreed mortgage repayments puts you in a dangerous position, as your mortgage lender would be well within their rights repossessing your home. This is why you need to think about protecting yourself and family against the unexpected and the only way to do this is with insurance.
Once you have decided that you will become a homeowner there are five broad areas of coverage with which you should be concerned with, several of which will be automatically determined and required by the institution providing the mortgage. These are:
Mortgage Indemnity Insurance
Mortgage Protection Insurance
Contractors All Risk Coverage
Building Insurance
Content Insurance
What is Mortgage Indemnity Insurance?
One of the first forms of coverage you will need when you decide to get a mortgage is Mortgage Indemnity Insurance (MII) and surprisingly lots of Bahamian have Mortgage Indemnity insurance but do not know that they have it or what it does for them. The good thing here is that your lender will not only require this coverage of you but will also facilitate the application, approval and placement process.
Remember I stated earlier that the estimated average cost of a home is $112,000.00, well with banking theory in the Bahamas holding that it’s dangerous to lend anyone more than 75 percent of the value of a house. It means that to get this mortgage you must come up with 25 percent of the purchase price or $28,000.00. After scraping together from relatives and friends, gifts, savings, mattress, rock holes, assues, other loans and any other sources your creativity can muster, despite pulling out all the stops, not many can come up with the $28,000 down payment required by most lenders. This coupled with the other closing expenses such as legal and stamp tax means that it will take a lot longer time to achieve your dream of becoming a homeowner. In the past persons had to delay their purchase until they have save the required amounts but today you have help!
This is where Mortgage Indemnity Insurance (MII) comes in. It helps you and your family get into your home a lot sooner! It is insurance designed to protect the lender from the borrower defaults but more than that it enables you to buy a home sooner, buy a bigger home, and enjoy the appreciation of the home as it make the down payment affordable and realist. MII make it possible for your down payment to now be as low 5%. Oh the miracle of insurance!
The lender wants to limit exposure or risk to 75% of the home’s value, or $84,000. That means that the MII must cover the remaining exposure. If a customer puts down 5% as a down payment, then the lender’s exposure is at 95%, or $106,400 in financing. MII insurance means that should you default on the loan amount, the lender would be repaid the difference between the lender’s exposure limit, in this case 75% and the buyer’s down payment. The MII would be on the difference of $22,400. As you make the monthly payments on the loan, the loan is amortized down and the exposure for the lender is lower.
With MII you now know that you don’t have to accumulate 25% of the purchase price for a down payment but you do have to qualify for the coverage. In order to qualify your monthly mortgage payment to debt ratio should not exceed 30% and your total debt ratio must not exceed 40 %. Insurance helping you and your family get there!
Glenn S. Ferguson, FLMI, HIA, founded Comprehensive Insurance Agents & Brokers & Comprehensive Consulting to assists both large, multi-national corporations, as well as smaller family owned businesses with their insurance decision-making. Glenn has been helping individuals and businesses in the Bahamas with their insurance needs for the last 18 years. He is a Fellow, Life Management Institute (FLMI); Associate of The Health Insurance Association of America (HIA) and a licensed insurance broker.
