Mortgage and insurance - chicken or egg?

[Sam Leon]

I have an executed contract to purchase a property in South Florida, the house is going to be a primary residence and not a rental for a change.

Seller needs to close no sooner than Feb 2019 to have time to arrange lodging.

I am applying for a conventional mortgage for this property, everything is "approved" subject to final review by the underwriters, which will not happen until about 30 days out.  So right now they have basically looked over everything but not quite in details I suspect.

During the inspection they detected some old pipes (polybutylene).  Oh boy!  So it looks like I have to budget time and $ for a repipe.  Still want the house.

Looking around for insurance quotes and two of the brokers provided preliminary quotes for Home owners insurance, wind storm insurance and flood insurance.  The HOI would not cover everything, due to the presence of polynutylene pipes, so it has a water damage exclusion clause in it.  

To me this is not a big concern because it is my plan to repipe after closing, then I will be able to show proof of the repipe and get the exclusion lifted.

However, not being able to get insurance with FULL coverage due to the piping, I believe it would be a red flag for the lender and may be reason for a denial.  I called the lender and sent over the insurance quotes and exclusions, and the loan rep says "it shouldn't be a problem".  However, I am thinking when underwriting takes a close look at it when it gets closer than 30 days, that's when they will see this red flag.  By then my loan contingency period has expired, and I will be faced with either losing the deposit or paying cash, right?

I also asked the insurance companies if they would give me full coverage for a short period, so far nothing.  It doesn't seem to be an insurance company that would provide full coverage even with added premium.

The seller was able to carry full coverage now, because his inspector was incompetent and didn't see the polybutylene pipes in 2008 when he bought it.

To me it seems my options are to either get the seller to repipe before the sale (zero chance) or I pay cash for the property?  I do not see the lender approving the loan unless someone dropped the ball unintentionally?

[Wayne Brooks]

I don’t know about the lender outlook on the insurance......

But as for your loan contingency.....if you are using the standard farbar contract, upon expiration of your loan contingency period, you do not automatically lose your EM if your loan is later rejected.

Upon loan contingency expiration, the seller has the right to cancel the contract, but usually doesn’t.  You still have up until 7 days prior to closing to cancel due to the mtg contingency and receive your EM back.....unless they have changed the language in the farbar in the last couple of years.  You can always of course close with cash anyway, if you have the funds, do a delayed finance later, after the pipes are replaced.