Another source of funds for home buyers in the first group is the life-insurance company. Prior to the war most of the larger companies did not make housing loans to any considerable extent, preferring to invest their funds in mortgages on large commercial structures, thus limiting the number of their transactions and the amount of their investigational and administrative work. With the housing shortage resulting from the war and the need for broader channels of investments, however, many of these companies entered the home-loan field and they have become an important factor in the business.
The loans of life insurance companies are placed through local agents-banks, trust companies, mortgage companies, and individuals trained in the work. These agents are permitted to accept applications only in connection with properties located in developed sections where values are stabilized. The man seeking a loan to finance the purchase of a house located on an unimproved street or in a section where real estate does not sell readily will not generally be able to obtain it from a life-insurance company. Applications from borrowers on properties located in growing communities and having the advantages of modern facilities, however, are eagerly sought.
The applicant is required to supply the loan agent with information bearing on the risk, on blanks furnished for the purpose. These forms call for a variety of data, such as the location, size, and contour of the lot, the condition of the building, the materials of which it is constructed, and its heating, lighting, and plumbing system. The agent investigates the risk, appraises the property, and reports to his company. His appraisal is invariably a conservative one, and the borrower should not be surprised if he learns that the home he has contracted to buy is valued for loan purposes at a figure somewhat below the price he has agreed to pay. This valuation is not necessarily a reflection on the wisdom of the purchase, for in determining the question of value a number of insurance companies are inclined to disregard certain items which are generally (and properly) considered by buyers and sellers as legitimate elements of worth. As an example of this, the appraisal policy of one of the largest companies in the home-loan field may be cited. This company does not allow its agents to include in their estimates of the cost of a building the builder's overhead expense, his carrying charges or profit. As a consequence of their appraisal methods the loans of the more conservative companies, though made up to 60 per cent of valuation, seldom represent more than 50 or 55 per cent of the cost of the property to the purchaser.
Insurance company loans run for periods as long as 15 years. Interest is at the rate prevailing in the locality where the loan is made, and is usually payable semiannually. In many cases the principal is required to be curtailed regularly on interest dates. The contract of one large company requires a payment of 3 per cent of the principal semiannually and gives the borrower the option of making larger payments or of taking up the entire loan after the third year. The plan of another company provides for the payment of the loan and interest in equal monthly installments over a period of 10 years. This company makes a life-insurance policy a part of the mortgage agreement, so that if the borrower should die the loan may be repaid from the insurance proceeds. In cases where such an insurance policy is involved the home-owner who wishes to sell his property shortly after the mortgage is placed is usually required to obtain the company's permission to transfer the loan to the new owner.
Insurance companies seldom lend their funds for construction purposes, and, therefore, where a family builds its home the money needed during the construction period must be supplied from some other source. The agent frequently arranges such a temporary loan, however, on the basis of his company's willingness to take over the financing when the structure is completed, and where banks and other financial institutions act as agents they often advance their own funds for the building period, after which the loan is transferred to the insurance company. Some additional expense to the borrower is usually involved in these instances.
The insurance company loan has this important advantage: It is made for a period sufficiently long to enable the borrower to repay it without the necessity of renewing, and thus to avoid the inconvenience and expense frequently incident to this process. Where amortization, or gradual repayment of the principal, is provided for, interest charges are reduced and the borrower is encouraged to get out of debt.