Paul Sanchez
Private money lenders need insurance to protect their interests and increase their profit share through additional revenue streams. There are several types of insurance that lenders should be aware of, including Mortgage Bankers Blanket Bond, Mortgage Company Professional Liability, and Forced Placed Insurance. Private mortgage insurance (PMI) is one of the most common types of insurance for private money lenders, protecting the lender—not the borrower—if the borrower stops making payments on their loan. PMI is typically required when a borrower takes out a conventional loan with a down payment of less than 20% of the purchase price. The cost of PMI can vary depending on factors such as the borrower's credit score, the size of the down payment, and the loan type. It is important for lenders to understand the specific risks associated with each deal and tailor their insurance policies accordingly.
What You'll Learn
Private mortgage insurance (PMI)
There are several types of PMI, including borrower-paid mortgage insurance, single-premium mortgage insurance, lender-paid mortgage insurance, and split-premium mortgage insurance. Borrower-paid mortgage insurance is the most common type, where the borrower pays a monthly fee in addition to their mortgage payment. Single-premium mortgage insurance is paid upfront in a lump sum at closing, resulting in lower monthly housing expenses. Lender-paid mortgage insurance is paid by the lender but is included in the interest rate of the loan. Split-premium mortgage insurance is a combination of the previous two, with a partial upfront payment and the remainder paid monthly.
PMI can help borrowers qualify for a loan that they may not have been able to obtain otherwise. However, it increases the overall cost of the loan. Borrowers can request the removal of PMI once they have accumulated 20% equity in their home, but it is automatically cancelled once the loan-to-value ratio reaches 78%.
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Direct Lenders Insurance Services (DLIS)
DLIS offers a comprehensive suite of insurance solutions to protect lenders, borrowers, and investors from all risks. Their insurance products include but are not limited to:
- Life Insurance on the borrower
- Disability Insurance
- Business Overhead Expense Insurance
- Private Mortgage Insurance
- Cross Collateralization
- Personal Umbrella Coverage
- Residential Coverage
DLIS also provides project risk consulting services to help clients understand the risks associated with their projects. This includes a financial analysis of the project(s) and risk mitigation strategies. The company charges a non-refundable retainer fee for this service.
In addition to their insurance offerings, DLIS is committed to protecting their clients' interests and helping them increase their profit share. The company's founders have over 25 years of experience in the financial industry, including extensive knowledge of banking, investment planning, and insurance.
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Mortgage Bankers Blanket Bond
A Mortgage Bankers Blanket Bond (MBBB) is a type of insurance coverage that protects mortgage bankers and brokers from losses due to criminal and dishonest employee activities. It is also known as a Blanket Fidelity Bond or a Banker's Blanket Bond (BBB).
The MBBB covers a range of fraudulent activities, including but not limited to:
- Primary Dishonesty, including premises and in-transit clauses
- Forged Checks and Documents
- Computer Manipulation
- Counterfeit Currency
- Fraudulent Real Property Mortgages
- Theft of Money or Collateral
- Specific Errors and Omissions
The MBBB can be applied to individual employees or specific job positions within the company. It is an extensive form of coverage that offers protection against losses that may not be contemplated under a traditional mercantile fidelity bond.
In the United States, the purchase of a Banker's Blanket Bond is often required by the firm's state regulatory authority and the Securities and Exchange Commission (SEC) for investment firms and other financial companies. It is a regulatory requirement in some states for banks to obtain fidelity bonds, including the MBBB, to operate.
The MBBB is distinct from most other insurance types as it safeguards against losses resulting from internal activities. It is classified as first-party coverage, protecting the institution itself rather than account holders or shareholders.
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Mortgage Company Professional Liability
Professional liability insurance protects businesses from claims of professional negligence, failure to deliver on promised services, breach of contract, errors, and general professional misconduct. It is important for any business providing services or advice to clients for a fee, as it can protect against costly and time-consuming legal battles.
The cost of professional liability insurance depends on various factors, including the industry, location, amount of coverage needed, number of employees, and previous claims. The median cost is $59 per month, according to Insureon.
It is worth noting that professional liability insurance does not cover bodily injury or property damage claims, nor does it cover lawsuits filed by employees. Businesses should also be aware that this type of insurance does not cover fraud or criminal action.
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Builders Risk Insurance
The cost of Builders Risk Insurance typically ranges from 1% to 5% of the total construction project budget. The factors influencing the cost include the project's cost, location, timeline, square footage, expertise of contractors and subcontractors, quality of construction materials, and project logistics.
When considering Builders Risk Insurance, it is advisable to work with an experienced insurance broker or agent who can help tailor the policy to your specific needs. It is also essential to review the policy thoroughly and discuss any areas of concern before purchasing it. Additionally, checking the provider's rating from a global credit rating firm like AM Best can provide insight into their financial stability.
Overall, Builders Risk Insurance is a valuable option for anyone with a financial interest in a construction project, as it provides protection against financial losses due to accidents or unforeseen events during the course of construction.
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Frequently asked questions
Private mortgage insurance (PMI) is a type of insurance that a lender may require you to purchase if your down payment is less than 20% of the home's cost. It is designed to protect the lender, not the borrower, in the case of default on payments.
The four main types of mortgage insurance include borrower-paid mortgage insurance, single-premium mortgage insurance, lender-paid mortgage insurance, and split-premium mortgage insurance.
Private money lenders should also consider insurance products such as life insurance on the borrower, disability insurance, business overhead expense insurance, cross-collateralization, and personal umbrella coverage.
