This latest blog update will be about the Homeowner’s Insurance policies for the remaining loan programs. USDA Loan Programs will not be covered in this blog update, as it is the only one with specific requirements. Homeowner’s Insurance requirements for the FHA and Conventional Loan programs and additional policies like Flood Insurance that may be required by the lender for the loan. For every loan program, a Homeowner’s Insurance policy may be mandatory for closing, especially if a home is being financed through a mortgage. However, a Homeowner’s Insurance policy does not always need to be active and is up to the sole discretion of the first time home owner after the first year of ownership. While this is not generally recommended, in case something happens that would otherwise be an extremely costly repair, it is not a law to have Homeowner’s Insurance.
Homeowner’s Insurance Requirements for the FHA and Conventional Loan Program
The Homeowner’s Insurance requirements for the FHA and Conventional Loan programs indicate that in order for the loan to be able to closed, the policy must have the following items:
- Dwelling Coverage to match the loan amount.
- If it’s lower than the loan amount, the Insurance Company must provide what is called a Replacement Cost Estimator, or RCE for short. This document breaks down how the Homeowner’s Insurance Company arrived at their dwelling coverage amount. This document along with the Homeowners Insurance should be enough to clear the condition, but it is also underwriter’s discretion.
- Named Insured and Mortgagee Clause to match loan documents
- The Homeowners Insurance policy must have the insured person(s) match the person(s) on the loan.
- Additionally, the Mortgagee section should have the Mortgagee Clause of the Lender, including the loan number. All of these items should match the loan documents exactly.
If you noticed, there isn’t a deductible restriction like there was for the USDA Loan program. While the deductible can be anything, the premium must be low enough to keep the debt-to-income ratio within the limits put together by the loan officer.
An insurance binder, Evidence of Insurance, Memorandum of Insurance, or Certificate of Insurance are all acceptable documents up to closing. However, a Homeowner’s Declaration’s Page and Invoice must be provided at closing. This is because an Evidence of Insurance and other documents have premiums and coverage that can be changed. If the premium increases past what has been previously accepted, this may render the first time home buyer ineligible for the loan due to debt-to-income ratios. For the FHA and Conventional Loan programs, the first year of insurance is paid by the first time home buyer’s lender out of the escrow account. This is so it’s guaranteed by loan closing that at least the first year is covered.
When the Home is in a Flood Zone: FHA and Conventional Loan Programs
When the home is considered by FEMA to be in a Flood Zone, the Lender may require Flood Insurance. This is indicative early on in the process by the Appraisal Report, as well as a Flood Certificate. For FHA and Conventional Loans, Flood Insurance has the same guidelines as regular Homeowner’s Insurance for Dwelling Coverage. The only difference is the underwriter requires the invoice to show as paid in full.