Home prices in the Dallas / Fort Worth metroplex have steadily risen since 2010. In December, they were up another 8.5% according to a recent Dallas Morning News article. Over the past 4 years, home prices in north Texas have surged more than 40%, and this impacts home buyers in several ways beyond just paying more for a home. The impact is felt with mortgages and even home insurance.
On the mortgage side of the equation, higher home prices mean larger mortgages which may impact the amount of home a person or family can buy. Buyers may also be faced with higher debt to income ratios, the amount of overall debt relative to their monthly income. Tighter ratios may mean buying a less expensive home or finding creative ways to lower overall expenses.
One of the more common issues many buyers and realtors face is having to offer more money than the purchase price to buy the home. While this is good news for the seller, if the appraisal doesn’t support the amount of money offered, it’s up to the buyers to bring cash to the closing to cover the higher purchase price in addition to the other closing costs. If the buyer doesn’t have enough cash to do so, the seller will move on to the next buyer.
There’s also been an impact on home insurance. Many people assume higher purchase prices will mean simply having more coverage on the home, but this is not always the case. In some cases, the overall home price exceeds the amount of coverage required to replace the home due to a total loss. Home insurance underwriters are more concerned about what it cost to replace a home than its purchase price.
To arrive at a home’s replacement cost, I ask the home buyer several questions. I confirm the square footage of the home, whether it’s one or more stories, the number of bedrooms and the type of living areas, the number and grade of the bathrooms, the grade of kitchen, and the type of floor coverings in the home. I also look at the type of roof, porches, patios, and other amenities such as crown molding, built ins, and whether the home has a pool or not. All this information is entered into each carrier’s replacement cost system which generates their estimate of the amount of coverage needed to rebuild the home after a total loss.
If the amount of coverage is less than the purchase price, I review the home’s appraisal to see what it states is the replacement cost value and discuss the amount of coverage with the loan originator to determine how much coverage is needed to satisfy the lender’s underwriters. If more coverage is required, I increase it and confirm with my underwriters they are willing to support that.
We all want to see the homeowner buy their dream home, but no home insurance company wants to see a home covered for more than the cost to rebuild the home and no homeowner wants the home to be underinsured if they face a catastrophic loss. What do you think? Share your thoughts, questions, and experiences with me on my Facebook, Google +, and LinkedIn pages. I’d love to hear from you!
