How is HO insurance handled in an unrecorded Land Contract?

Question

We have a seller held mtg and the taxes and insurance are escrowed into the payment. Do we add the new owner to the policy? Our fear is if the new owners get their own policy and just add us and we cancel ours, then our mtg co would find out since they pay our insurance through the escrow account.

Also, would the insurance payout pay the seller mtg first, buyer mtg second, buyer third if any left? Example: Seller mtg 120K, buyers mtg 149K, home worth 159K.

Answer 1

This question involves a lot of details that would take a long time to fully explain, so you're going to have to take a lot of this on faith.

First of all, insurance companies are unlikely to write insurance for anyone whose interest in the property is not a matter of public record. That means the seller in your situation MUST get the insurance. You could probably convince them to put the buyer's name as "additional insured", but that's a really bad idea. If you want to know why, ask your agent. If he doesn't know why, change agents.

Second, your question of who gets paid first.... the insurance company will write one check, made out to the insured (owner) and anyone listed as "additional insured" (lenders). It isn't as simple as having the lender having an interest in the property on the land records, the policyholder obtaining the insurance has to have listed the lender. Between multiple lenders, they will divide the proceeds according to their priority based on which was recorded first. Unrecorded mortgages get nothing.

I can assure you that the situation you described will not occur. No lender is going to loan a buyer money on an unrecorded interest in land. No lender is going to loan a buyer money where the total loan value exceeds the value of the land that greatly, and particularly not when there is an existing first mortgage. The 149K lender in your scenario would demand a "subordination" of the first mortgage, which the first mortgagee would not only refuse, but ask you some questions about this person claiming to be the owner, questions which would trigger your "due on sale" clause.

For the reality of your situation, the seller has to get the insurance, partly because the buyer cannot, and partly because the seller's mortgage requires it. As far as who gets paid what is left when the seller's recorded mortgage is paid, that depends on what the contract says. If it is written like most would be, the seller keeps that excess, and the amount that the buyer owes the seller is reduced by the insurance proceeds, and the buyer still owes the seller for any difference, but is still entitled to receive title to the vacant land.

Answer 2

Land Contract Insurance

Answer 3

You should talk to your insurance agent about this. The buyers should pay for fire insurance to protect the lender (that's you) and can elect to have homeowners coverage which is more comprehensive. How payment of the premium is made is negotiable.

Answer 4

It's possible for sure

Answer 5

Was asking myself the same question