There seems to be a new trend regarding insurance and homes losing value. Perhaps the unfortunate part is that all these new services are arriving at a time when home prices are rising, not falling.
The latest thing I’ve come across is so-called “down payment protection,” otherwise known as insurance for your down payment, offered by a company called ValueInsured.
The refer to their product as +Plus Down Payment Protection.
I dug into the details a bit on their website to see what it’s all about, and while it apparently won’t launch until January 2016, the product seem pretty straightforward.
How Down Payment Protection Works
Put simply, you take out “coverage” on your down payment when you buy a home via the +Plus product from ValueInsured.
Their pitch is that lenders are already protected via the homeowners insurance you pay, and the private mortgage insurance you must purchase if your down payment is less than 80%.
However, you the homeowner don’t have any insurance if property values drop, unless you want to bite the bullet and sell short.
With +Plus Down Payment Protection, you could get your full down payment back if you sell for a loss, though a couple of things will need to happen.
First, you would need to sell your home for less than what you purchased it for. Secondly, the FHFA Home Price Index (HPI) for your particular state would also need to be lower than it was on the date you purchased your property.
After five years, home prices have taken a turn for the worse and your home is now valued at only $80,000. You still want to sell because you have no other choice, but you’re upset about the lost equity.
With down payment protection, your losses might be covered if the HPI also dropped.
Ideally, you’d want the HPI in your state to fall by the full 20% between the time you purchased and sold to get the full down payment back.
But if it only fell by say 10% and you sold for $80,000 (-20%), you’d only be entitled to $10,000, or half of your original down payment.
Ultimately, you can only get your down payment back, not any extra cash if things really get ugly.
I suppose it could go either way depending on where the property is located in your state, but catching a 20% loss seems unlikely.
More Details About the +Plus Program from ValueInsured
With this particular company’s product, you can only get a “policy” if the property is owner-occupied. You must live in it the entire time as well.
Additionally, the home sale must be at least two years after the purchase date, but no longer than seven years after.
So there’s a sweet spot, which the company claims coincides with historical holding periods of single-family homes. It’s generally true that most people don’t stay in one place for very long.
Still, this means the window to cash in on your home losing value is pretty slim. We’re talking five years to get compensated for any losses related to your down payment.
It looks like lenders may offer the product, perhaps as an interest rate adjustment, so taking a slightly higher rate in exchange for the down payment protection.
For the record, the home sale can’t be to a related party and no leasebacks are permitted.
And the insurance won’t cover improvements to your home, prepayments to the loan balance, or real estate brokerage costs associated with the purchase or sale.
Ultimately, you have to wonder why you’re buying a home if you need to insure the down payment. You should have a little more confidence than that.
Sure, things can happen, but like the company even points out, you’re already paying for a ton of different insurance policies, and if you need another one, maybe renting makes more sense, at least until the climate improves.
ValueInsured Now Offering Equity Protection on Refinances
In late October 2017, ValueInsured began offering a new product called “+Plus Equity Protection” on home refinances.
The concept is the same as the original product except instead of protecting your down payment from home price declines, the coverage protects your home equity if the housing market goes downhill after you refinance.
The company will apparently “reimburse up to the full amount of the homeowner’s equity” if home prices have declined and the property is sold for a loss. So perhaps that means the coverage isn’t limited to 20% like it is with the purchase product.
If the lender you’re refinancing with offers the product, you may be given the opportunity to protect your equity for a cost.