When is the last time the mortgage industry saw a new product designed to benefit the homebuyer? According to Joseph Melendez, founder and CEO of ValueInsured, it may have been the advent of home warranty policies in the 1970s — so, obviously, homebuyers could use a little innovation.
That’s what led ValueInsured to introduce +Plus, a new “down payment protection program” that safeguards buyers’ down payments and reimburses those funds in the event of a loss when they sell in a market downturn.
“Investors and lenders are insured. Now homeowners have the opportunity to insure their part of the transaction,” Melendez, who has worked in the financial services industry for three decades, said.
“This is a brand-new product class, and we’re very excited to fill this need in the market.”
According to many economists and real estate industry data providers, the ability of borrowers to save up for a down payment is one of the biggest barriers to homeownership, particularly among millennials, who are saddled with student loan debt and lackluster job options.
As a result, would-be borrowers have created a new set of homebuying expectations, said Cleve Bellar, ValueInsured’s chief marketing officer. When they do manage to save up a nest egg for a down payment, they want to protect that investment.
“The millennial mindset has created today’s modern homebuyer,” Bellar said. “The millennial mindset is not defined by age or demographics. It’s a group with common sense, savvy, the desire to control their own destiny and, ultimately, the need to protect their hard-earned savings.
“They demand clear and simple services, terms that are fair and tools that give them control over their buying options.”
Here’s how +Plus works: If a homeowner’s life circumstances force him to sell his home at a time the market is low, +Plus will reimburse up to the full amount of his down payment.
Coverage only applies if the sale price of the home is lower than the purchase price, and if the Federal Housing Finance Administration (FHFA) Home Price Index (HPI) for the homeowner’s state at the time of sale is lower than it was on the date he purchased the home. The payout is calculated as the lesser of the homeowner’s down payment; the actual equity lost; or the purchase price of the home, times the reduction in the homeowner’s state HPI.
For example, if the homeowner purchased his home for $100,000 and put 20 percent, or $20,000, down, and decided to sell it in five years, he could receive $10,000 to the full $20,000 back, depending on the sale price and the change in HPI.
There are some eligibility requirements:
- The sale must occur at least two years after the initial purchase — this is designed to thwart property flippers who might take advantage of the program — but no later than seven years after the purchase.
- The home must be owner-occupied during the entire coverage period; rentals are not eligible.
- The sale must be to an unrelated party, and no leasebacks are allowed.
- Finally, the insurance does not cover the cost of any improvements the homeowner makes to the property; prepayments toward the loan balance; or real estate brokerage and other costs associated with the purchase or sale.
“We also don’t cover foreclosures,” Melendez said. “The whole point is to enable you to get into the house, live the way you want to live and participate in the biggest wealth-builder in America, and if you must exit, you are insured that what you invested in this house can be put down on the purchase of your next house.”
To purchase the policy, the buyer pays a one-time fee at the time of closing, with no deductible — not unlike title insurance.
Rates will vary depending on the buyer’s state, but on average, buyers will pay about $1,000 for the policy. In some cases, lenders may agree to pay for the coverage and charge the buyer a higher interest rate, which would increase monthly, or other periodic loan payments.
Other options include a seller paying for it, or a buyer’s agent paying for it.
“We want to make sure Realtors and loan officers know about it, because they are trusted advisors of their clients. They can say to the buyer, ‘Don’t be afraid to make this offer, because you can insure your down payment from risk of loss,’” Melendez said.
“Investors and lenders are insured. Now homeowners have the opportunity to insure their part of the transaction.” Joseph Melendez, founder and CEO of ValueInsured
The +Plus program will be available to buyers of existing or new single-family homes in all 50 states after January 2016. The policy will be listed as a line item on the Closing Disclosure form.
ValueInsured intentionally waited to roll out the product until the industry’s adoption of the TILA-RESPA Integrated Disclosure, or TRID, rule. Had the program been available sooner, it would have been listed on the HUD-1 Settlement Statement.
“We didn’t want to come to market knowing that there was going to be this huge wholesale change in closings and LOS systems, and have to reinvent the wheel,” Melendez said.
The +Plus program is underwritten by Houston International Insurance Group and reinsured by Everest Re Group Ltd.