Contractor Insurance Requirements under the Home Repair and Remodeling Act

Under the Illinois Home Repair and Remodeling Act, contractors are required to follow a number of rules in order to enter into a valid and enforceable contract with a homeowner. One of the most important features of the Act is that it requires the contractor to maintain sufficient insurance to protect the property owner in the event of damage. Specifically, contractors must have public liability and property damage insurance of at least $100,000 per person and $300,000 per occurrence in the case of bodily injury. They must also maintain insurance of $50,000 per occurrence for property damage. Additionally, because sometimes repairs fail to comply with applicable state, county, or local ordinances, contractors are required to maintain public liability and property damage insurance of $10,000 per occurrence, the proceeds of which would be used to remedy such non-conformance, if any.

Why is it that many contractors fail to maintain insurance policies such as those described above? Well, the insurance provisions of the Home Repair and Remodeling Act only apply to those contractors who have a net worth of $1 million or more, as stated in the contractor's financial statement as prepared within the last 13 months.

Therefore, when you are looking for a contractor, make sure you discuss insurance openly. If your contractor's net worth is less than $1 million, he may maintain little or no insurance. You need to make sure that your contractor not only has sufficient insurance, but that you, your homeowners' association (if any), and your lender (if any) are also added to the contractor's insurance policy as additional insureds. Any subcontractors working on your property should also maintain sufficient insurance and should also add you to their policy.

FHA and Mortgage Insurance -- What is the UFMIP?

FHA loans help to make real estate more affordable by allowing you to obtain a loan with a relatively small down payment. In today's market, you are required to put a substantial amount of money down for conventional financing, whereas you may be able to get an FHA loan with only 3% down. Because FHA loans are insured by the Federal Housing Authority, they are strictly regulated by them as well.

But the Federal Housing Authority won't insure your FHA loan for nothing. That's where the Up Front Mortgage Insurance Premium (the UFMIP) comes in. The UFMIP is similar to regular mortgage insurance -- it's insurance you, as the borrower, pay for to cover the balance of your mortgage in case you default.

However, the UFMIP is a bit more hefty. Typically, your premium will be about 1.75% of your loan amount (note the FHA changes the premium periodically -- last summer it was only 1.50%). In other words, if you are borrowing $200,000 today, your UFMIP will be $3500. You will pay the premium at closing, and you will also pay monthly premiums with your mortgage payment.

When buying a home with an FHA loan, keep the UFMIP in mind. The cost is considerable. Then again, you also get to buy your home -- and without the FHA and their required UFMIP payment, you may be unable to buy one otherwise.

Mortgage Insurance Basics

So you're trying to buy a home, but you have to pay mortgage insurance. What does that mean? How does it work?

In a standard real estate transaction, a buyer puts at least 20% down. All buyers, however, cannot afford to do that. When you are putting less than 20% down, banks are concerned that you have not invested enough of your own money into your home. They are also concerned that you won't be able to afford your monthly payment if your circumstances change. Mortgage insurance came about as a result of these concerns. Simply put, mortgage insurance is insurance for your lender in the event that you cannot make payments any longer and your lender cannot recoup its losses.

How does mortgage insurance work? If you are putting less than 20% down and have only one loan, your lender will have to arrange for mortgage insurance for you. Mortgage insurance companies typically take from 1-14 days to underwrite a file. A mortgage insurance company may decline your file, and then your lender will have to submit it to a different mortgage insurance company. If all goes well, your loan and your mortgage insurance will be approved. When you close on your purchase, you may pay an upfront premium for the mortgage insurance. Additionally, you will pay a monthly premium with your mortgage payment, depending on the size of your loan. Your lender will be able to tell you how much the mortgage insurance premium will be.

Mortgage insurance is often known as PMI, but this is a misconception. While the terms are used interchangeably, PMI (Private Mortgage Insurance) is actually the name of a specific company that offers mortgage insurance products. While many people refer to mortgage insurance as PMI, PMI is simply a brand. When you close on your purchase, your mortgage insurance may be offered through PMI or one of many other mortgage insurance companies.