How to Insure Properties Taken ‘Subject To’ the Existing Loan

Out-of-the-Box Insurance Solutions!Prior to the late 1980’s, mortgages were written differently than they are today and investors and homeowner’s purchasing new property commonly used the ‘Subject To’ method of assuming the seller’s underlying loan as a main-stream and accepted purchasing method. However, after the Savings and Loan debacle, and the subsequent removal of popular NENQ (Non-Escalating Non-Qualifying) loans, the method of using ‘Subject-To’ financing was swiftly brought to an end.  That said, however, with the new ‘credit crunch’, the record-high number of foreclosures, a declining housing market, and the recent changes in loan programs; investors are locating bargains and, although technically not allowed, the ‘Subject-To’ method is again alive and doing very well.

The biggest problem with this method of obtaining property is that there are almost no remaining ‘assumable’ loans left in the market and the mortgage loans used today strictly prohibit another party from assuming this debt. While many investors still create these assumption-purchase scenarios in order to easily obtain a new bargain property, the fact is that they are trying to ‘skirt’ the system and they are taking a calculated risk that the underlying mortgagee either won’t find out that the loan has been assumed or else they simply won’t care so long as the mortgage is being paid.  In either case, it’s a gray area at best and property insurance is really not designed to be used in these types of scenarios; which only adds another complication.  Simply put, there is no ‘perfect’ or ‘clean’ way of insuring these properties unless your agent is willing to risk his license, pay fines, lose appointments with insurance carriers, and violate the law.

Insuring ‘Subject-To’ property is often tedious because investors do not want to trigger the ‘Due On Sale’ clause, found in modern mortgage loans, by sending the mortgagee a new insurance declaration’s page with a named-insured different than that of the original owner (remember, this is ‘skirting’ the established mortgage system).  The reality regarding this concern; however, is very, very minor.  The most common question is “Won’t the underlying lender call the loan due if they find out that I now own the property?  Technically speaking, they could.  Practically speaking, they won’t.  Banks are in the business of making loans, not collecting houses, and as long as payments are being made they usually don’t care whose making them.  As we already said, banks don’t want houses, they want payments, and as long as they have a performing asset they are not going to call the loan due in order to give up their on-time payments in return for a non-performing asset which now costs them money.  This is especially true in the current market.

Unfortunately, many real estate professionals and ‘gurus’ (which know absolutely nothing about insurance laws and some of which we actually know) teach that the homeowner’s policy should be kept in place with the ‘seller/owner’ and that the investor should actually purchase a second policy for their ’new’ insurable interest.  This supposedly keeps the mortgagee in-the-dark about the transaction and makes everything clean for the new investor-owner.  This is wrong!  Sure, it can be done, but the reality is that in the event of a claim it will probably constitute both loan fraud (since the mortgage terms have been intentionally violated and the mortgagee not notified of the new sale) as well as insurance fraud (since all parties have knowingly double-insured the property to avoid disclosure to the lender).

First of all, depending upon the state the property is in, it is either illegal or in violation of state insurance laws and regulations to have duplicate coverage on the same property.  Just like you cannot have two insurance policies for your car, you can’t have two insurance policies for the same property.
Secondly, you cannot maintain a “homeowner’s” policy with the seller listed as the named-insured on a non-owner occupied residence no longer titled in the original owner’s name, this can be considered insurance fraud if there is ever a claim and although the seller’s name is on the original mortgage loan, you (the investor) are technically the new owner on title and unless you are living in the home as your own personal residence, this is going to require a new dwelling (not homeowner) policy.

Third, another reason you don’t want to have the seller continue to maintain his or her current insurance as the ‘named insured’ is due to the fact that he or she is no longer the actual owner. Again, this is fraudulent.  It’s true that the seller is still responsible for the underlying loan because he or she signed the original Promissory Note, but the property is no longer titled in the seller’s name – hence the seller cannot legally purchase or pay for the insurance.  Also, if the seller did keep the insurance in place and listed you (the investor/owner) as an ‘additional interest’, only the liability protection of the policy is extended to you and the seller still has ownership and complete control of the policy and the seller is then the only one who can make changes or file claims and he or she is legally entitled to any and all claim settlements and refunds from the insurance company.

In summary, although it’s probably not what many investors want to hear, you (as the new owner) must obtain a new dwelling policy with your name listed as the ‘Primary Insured’.  There is usually no other way.  While many agents and gurus may give you different information, tell you what you want to hear, or may issue policies however you want it done, the truth is that they are incorrect and, if there ever is a claim (the whole point of having insurance), it will probably be denied flat and the policy canceled because it was mis-written and, in some cases, illegal.  We’re investors ourselves and we understand what can happen.

If you have the home in the name of an LLC or other entity, this entity should be listed as an ‘Additional Interest‘ (NOT the ‘Additional Insured‘ in most cases – there is a blurry legal difference in these terms that actually matters).  All property and liability coverages should carry over to the entity listed as the ‘Additional Interest’ while, in many cases, only liability protection extends to ‘Additional Insureds’.  Also most carriers will not allow a policy for personal residential property to be issued with a commercial or corporate entity as the Primary Insured.  Why?  Because in addition to the carrier’s potential legal issues later on in the event of a claim, that defeats the purpose of it being issued as residential personal property, it would then be considered a ‘commercial venture’ and that’s what commercial policies are designed for. We specialize in investment and ’Subject-To’ properties and we can help with all of your investment property and key-person insurance needs.