For this part of the update, we’ll be discussing more of what it’s like to go through the Conventional loan process. The Conventional loan program has a bit of leniency when it comes to the Appraisal Report and Homeowner’s Insurance requirements when compared to the USDA Loan program!

The Appraisal Report

For Conventional Home Loans, the appraisal report is less likely to cause any issues during the home loan process than other loan programs. One of the few issues that the appraisal can cause is only if the home appraises below the listed purchase price. 

If the home appraises low, the seller and buyer will need to renegotiate the purchase contract agreement and come to a favorable result. If the seller chooses not to lower the price to meet the appraised amount, the transaction can be canceled and this can force the would-be home buyer to look for another home.

However, If the borrower wins the negotiation and the seller lowers the purchase price, this may actually turn out favorable for the borrower. If the home is a bit cheaper, this may actually allow a borrower to have a small reduction in their monthly payment upon successfully closing on the home!

If a home has repairs that the appraiser recommends and the appraiser lists the repairs needed, it’s up to the borrower’s discretion if he chooses to get these repairs done.

If repairs are done, a completion report must be completed showing that the aforementioned repairs have been completed with proof, including photos.

Homeowner’s Insurance Requirements for the Conventional Loan Program

The Homeowner’s Insurance requirements for the Conventional Loan program indicates that in order for the loan to be able to be closed, the policy must have the following items:

  • Dwelling Coverage to match the loan amount.
    • If it’s lower than the loan amount, the Insurance Company must provide what is called a Replacement Cost Estimator, or RCE for short. This document breaks down how the Homeowner’s Insurance Company arrived at their dwelling coverage amount. This document along with the Homeowners Insurance should be enough to clear the condition, but it is also underwriter’s discretion.
  • Named Insured, Property Address, and Mortgagee Clause to match all loan documents.
    • The Homeowners Insurance policy must have the insured person(s) match the person(s) on the loan.  Additionally, the Mortgagee section should have the Mortgagee Clause of the Lender, including the loan number. All of these items should match the loan documents exactly.
  • Acceptable Deductible
    • Remember the debt-to-income ratio for the borrower must remain below a specific amount.

An insurance binder, Evidence of Insurance, Memorandum of Insurance, or Certificate of Insurance are all acceptable documents up to closing. However, a Homeowners Insurance Declaration’s Page and Invoice must be provided at closing.

This is because an Evidence of Insurance and other documents have premiums and coverages that can be changed.  If the premium increases past what has been previously accepted, this may render the home buyer ineligible for the loan due to debt-to-income ratios.