A new product called “down payment insurance” came to market this year, meant to protect homebuyers the same way that private mortgage insurance protects lenders and the GSEs.

Texas-based ValueInsured, the only company offering down payment insurance, launched in 2016 and began selling the product this year.

“Take that same concept and protect the person who is taking the money out of the bank and putting it into the home and losing the protection it had while it was in the bank,” said Joe Melendez, CEO of ValueInsured. “Give borrowers the same protection the lenders have had for decades. Now both sides can be equally protected. That’s the fair way to buy a home. There hasn’t been in innovation in real estate like this in 40 years, since home warrantees were introduced.”

The product is offered through partnerships with lenders, who don’t make any money on the sale but can promote it as a value-added feature that distinguishes them from other lenders.

The buyer pays a slightly higher interest rate, which covers the cost of the premium.

“Most lenders compete on interest rate and points, but our lenders compete on the additional protection,” Melendez said. “Our lenders are making sure you can get in your home today and  also making sure you can get out tomorrow. It’s especially good to give Millennials confidence in the market. There’s a lot of noise in the market, like proposed tax cuts, the federal reserve raising rates. Once you change the buyers’ perception, they’ll be less reluctant to enter the market. Millennials tell us they would buy a home sooner if they had more confidence.”

It works like this: For a one-time fee, a homebuyer’s down payment is insured if they have to sell the house at a loss between two and seven years after the closing date. In Massachusetts, a buyer who puts $120,000 down on a $600,000 home could insure their down payment for $5,580. If they put $60,000 down, the premium would be $4,200.

“A one-time premium of $3,600 translates to about $10 a month,” Melendez said. “It works like PMI. Homebuyers are under enough stress to come up with enough money to bring to the closing table, so we built it into the loan.”

The two- to seven-year window was deliberately designed. Two years discourages house-flippers, and most buyers who have been in a home for seven years are likely to stay in it for a considerably longer length of time and likely won’t need the protection. The period between two and seven years is where homeowners face the most risk, Melendez said.

Hot In Colorado

Down payment insurance could be a good bet in a market like Greater Boston’s, with its recent steep home appreciation, said Rich Rosa, attorney and co-founder and co-owner of Buyers Broker Only LLC. Rosa said he likes the idea of a product that protects homebuyers, but would want to see the fine print of the contract.

“Are there exceptions that would result in the insurance company not paying the claim?” he said. “How does the insurance company protect itself from fraud? What prevents me from selling my $600,000 house to my friend for $500,000 even though the market value is closer to $575,000 if I know insurance will cover up to $120,000 in down payment loss?”

This is a scenario Melendez has considered: The purchase price times the percent reduction in the FHFA House Price Index of the state the home is located in is the maximum loss. So if the home value dropped significantly and values in that metropolitan statistical area didn’t, the full down payment might not be covered.

“I think the insurance could be beneficial to some homebuyers given how much the market has increased over the past five years, especially if the homebuyers believe there is a good chance they might move in less than seven years,” Ross said.

That describes ValueInsured’s success stories so far.

“One of our strongest markets is Denver, Colorado,” Melendez said. “It’s one of those hot markets that has had exceptional price appreciation and we’re starting to see some softening. Overheated appreciation is a hot market for us. People want to buy, but they don’t like risk. Seattle is like that too.”

Connecticut A Good Example

ValueInsured is on track to have 25 lenders who produce $250 billion in mortgages selling down payment insurance by mid-2018, Melendez said.

“We want to help them grow their businesses,” he said. “Next year the country’s mortgage market should be about $1.7 trillion.”

Melendez, who is based in Connecticut, used General Electric’s unexpected headquarters move from Fairfield to Boston as an example of when his product would be helpful.

“Through no fault of their own, many of [GE’s employees] who were living in moderately-priced homes had to sell them,” he said. “They were followed by Aetna. Nobody knows when these things will happen, but if you don’t have to shoulder that risk, why do it? We read about banks hedging themselves against risks all the time. If you can bring the same hedging ability to a homeowner, why not do it?”

Nobody does know when these things will happen – or how bad the situation will be. Ross said his biggest concern would be that a big slump in the market – like the Great Recession – would put ValueInsured out of business, leaving policyholders out of luck.

ValueInsured isn’t an insurer, but rather an insurance agency, and is backed by Houston and Everest Reinsurance companies.

Down payment insurance could be more beneficial for homebuyers who are buying a home that might be harder to sell in a down market, Ross said. Homes in less desirable locations; single-family with two or fewer bedrooms; certain condominiums; and homes that need remodeling or repairs are some examples he gave.

“Again, I think it is extremely important that homebuyers ask their real estate attorney to review the insurance contract to understand the scenarios where they might not be paid,” he said.