Buying a foreclosed home is not without risk. You could end up getting an amazing deal on a fabulous home or you could end up buying a money pit. One of the other risks associated with buying a foreclosed home is home insurance. Most people don’t realize, but not every home insurance company will write a policy on a home that’s been foreclosed on. Let’s look at why some companies won’t, some might, and for those where it’s not an issue.
No: Many home insurance companies won’t write a home insurance policy on a foreclosure ever. Companies who have no tolerance for foreclosures have created underwriting guidelines specifically prohibiting extending a policy to cover one. The chief reason for such as prohibition is that in their experience, foreclosed properties may be in poorer condition and more likely to have claims filed. If your primary home insurance company won’t write a policy on a foreclosed home, you’re better off finding a different home or a home insurance carrier who will write a policy.
Maybe: The second category of companies are those who may or may not write a home insurance policy on a foreclosure. There are one to two factors that determine whether they will or not. The first one is the length of time the home has been on the market. In this case, the home insurance company will write the policy if it’s been in foreclosure for a short period such as 30, 60, or maybe 90 days. However, if the length of time is longer, underwriting may decline to write a policy.
The second factor, having a pre-sale inspection by a licensed home inspector, may help the underwriter extend the time frame to consider writing a policy or may be a requirement to write the policy in the first place. The advantage of having a home inspection is determining whether the home’s condition is good or rife with problems. Some banks allow home inspections on foreclosed properties and others do not. If neither condition is met, then most insurance companies in the “maybe” category will avoid writing a home insurance policy on the home.
Yes: Several home insurance companies do not have an underwriting guideline the prohibits writing a foreclosed home. It’s not an underwriting question which I answer and these are the companies I focus on when the home being purchased is a foreclosure. They look at other underwriting factors when writing a home insurance policy.
Even so, all carriers will conduct a home inspection once the policy has gone into effect and may require the owner perform repairs on the home to bring it up to an acceptable maintenance condition. These may include scraping peeling paint and repainting the home, replacing cracked window panes, cutting away tree limbs from touching the roof, replacing damaged siding, and more. A home in good condition is less likely to have a home insurance claim filed than one that’s not.
Foreclosed homes have become less of an underwriting issue than they were in 2010 when 30% of all homes on the market in north Texas were foreclosures. Their number has been declining since then and accounted for less than 4% of all homes on the market in the first 11 months of 2016. Before buying one, be sure to know what the insurance implications are. You’ll be glad you did. If you have a question, comment, or experience please share them with me on my Facebook, Google +, and LinkedIn pages. I’d love to hear from you!
