Renovating before moving in
Sam Schneiderman, broker owner of Greater Boston Home Team brings you a must-read for anyone planning to buy and renovate.
It's not uncommon to buy a home and do some renovations before moving in. Many buyers do cosmetic updating like paint and/or floor sanding, but when improvements are more extensive and delay occupying the house, buyers need to make sure that the house is properly insured and that their loan allows them to delay occupancy.
Recently, I helped buyer-clients purchase a home that they intended to renovate extensively before moving in. Planning and renovating would take between two and four months before they could occupy.
They purchased with a typical mortgage for owner-occupants. Knowing that the home was going to be unoccupied for a few months, their insurance agent obtained a construction policy to cover the vacant renovation period.
Unfortunately, there are problems with that strategy.
First, singe-family mortgages typically specify that the buyers will move in within 30 days of closing. Technically, failure to meet that requirement constitutes mortgage fraud and most lenders are not that specific about the timing requirement on their loan applications.
Second, insurance for an owner-occupied loan is different than insurance for a vacant house undergoing renovations.
Before closing, the lender's attorney and/or underwriter reviews the insurance binder to make sure that coverage is adequate, names the lender (so that they are notified in case of a loss) and matches the type of loan requested.
In this case, the lender refused to close with construction insurance and that policy raised questions about the buyers’ true intentions. (Were they really intending to renovate and move in?) The lender insisted on an affidavit from the buyer detailing the work planned, a statement assuring them that the exterior of the building was not going to be expanded (which could indicate potential zoning issues) and when the house would become owner-occupied.
Since we did not learn about the dilemma until we walked into a noon closing, we had only a couple of hours to:
(1) address the lender's concerns about occupancy so that they would fund the loan and (2) obtain an acceptable insurance binder
or the sellers could keep the buyers deposit or charge them to extend the closing date.
I suggested getting a second opinion on the insurance and my agent was able to bind insurance with a standard homeowner’s policy plus a rider that covered the construction period, at a cost thousands of dollars less than the original construction policy. The lender accepted the new policy and buyer’s affidavit we closed just in time.
Perspective:
1. Always discuss your plans openly with your lender and insurance agent well in advance.
2. Have the insurance binder sent to the lender several days before closing, along with all other outstanding items.
3. Be aware that lenders can cancel closings if you no longer meet their criteria. In this case, the lender actually removed the mortgage money from the attorney’s closing account once the lender became concerned about the owner-occupancy issue and needed to re-deposit those funds to close the loan.
