Lending and Insurance Issues

[Matthew Davey]

I'm going to do my best to briefly explain the situation. I purchased a quadplex as a "house hack" while working as the realtor on the deal, using a VA loan. The underwriter secured a lender that was willing to accept the existing X-Wind policy, which excluded windstorm coverage.

That original lender subsequently sold the loan to a new lender. Several months later, when my insurance provider denied a renewal, I was required to obtain a new policy. This prompted the new lender to review my insurance coverage, at which point they discovered the absence of windstorm insurance. As a result, they force-placed windstorm coverage on the property, adding approximately $15,000 annually to my policy.

No insurers were offering windstorm coverage at the time, so it took a while for the force-placed insurance to go into effect. By the time the lender adjusted the monthly mortgage to account for the increased escrow requirements, I had effectively accrued a full year's worth of insurance payments over just six months—resulting in a $2,700 monthly increase. My original mortgage payment was $9,000, but it's now $11,700 solely due to this insurance change.

This issue arose only because the new lender purchased the loan and then imposed the windstorm insurance requirement—after the policy renewal had already occurred. They held the loan for six months before identifying the coverage gap. Had my original insurance policy been renewed without issue, the lender likely would never have noticed the absence of windstorm coverage.

I'm not trying to play a “gotcha” game with the lender, but I do believe the responsibility lies with them for failing to thoroughly assess the policy before acquiring the loan. If this coverage requirement had been in place when the loan was initially originated, I would not have qualified for the same mortgage terms.

Are there any legal angles I should be considering here? Or am I simply out of luck, with no recourse? Are there any recommendations, better insurance companies, or lenders that will waive wind-storm insurance or allow for self-insure? I'm looking for any creative solutions. 

Thank you, Matt

[Chris Seveney]

Quote from @Matthew Davey:

Everyone, Thank you so much for the responses, it is very much appreciated.

Raymond- Yes Florida, but Florida does not require by law Windstorm coverage. This was discussed extensively during my initial closing, however most lenders have that requirement. Yes, the purchasing lender(Flagstaff) may have missed the lack of coverage but, that shouldn't that be on them, because I would not have qualified for the loan if the coverage was added during underwriting. This seems like predatory lending. The lenders set me up to fail.

Chris- I'm hoping you're not right about the no recourse. Your recommendation is appreciated but if I do find another lender they will not have a 5.5% interest rate, so I may gain in the insurance department but lose in the interest rate department. I will look more into this, Ive just been hoping for interest rates to come down, we will see. I may have to sell.

Erik- I'm sorry I did a poor job explaining that part. The Mortgage Broker that completed the underwriting for the property purchased used the previous owner's insurance carriers and policy terms for closing, because they were good carries with good terms and the carrier was familiar with the property. There are multiple policies because It has flood, Homeowner's, and now Wind with all different insurance carries. The homeowner's policy had an "X-WIND" policy meaning wind was excluded written in BOLD on the Declaration page. Rocket mortgage accepted these conditions at closing and it was NOT accidentally missed, because it was directly addressed multiple times via email and phone call. However, the closing documents do state that the lender can require wind insurance from the borrower. At closing it was accepted that there was no wind coverage, and after rocket mortgage sold the note on the secondary mortgage market, the new lender (flagstaff) purchased the loan under those circumstances. For 6+months everything was just fine, but at the expiration of the insurance policy, the insurance carrier denied a renewal. A new coverage was acquired and REVIEWED by flagstaff, at which point flagstaff (note purchaser) said to me "you don't have wind coverage" as if it were a surprise and then required it moving forward.

All advice is very much appreciated, I'm open to creative solutions, even private lending where I can self insurance for wind. I've tried to negotiate with flagstaff. I believe all these conversations with flagstaff mortgage and insurance departments has prompted them to sell the note again.

Thank you

 Devil in the details  - I was going to ask what your loan documents state for insurance requirements and you answered the question which was they can require wind insurance.