FHA loans require that the property being purchased has homeowners insurance in effect, on the day of closing. In addition to homeowners insurance, certain properties may require additional insurance coverages, i.e. flood insurance, and that will be determined during the loan process. The insurance policies required need to remain in effect, as long as there is a mortgage on the property. The insurance policies will be paid as part of the monthly mortgage payment, on all FHA loans. The consumer has the right to choose their own insurance carrier, as long as the policy meets FHA requirements. The consumer can also switch insurance carriers at any time, the consumer simply needs to notify the mortgage servicer of any changes. If a consumer cancels an insurance policy, and does not replace it with a new carrier, the mortgage servicer will force/find an insurance carrier for the consumer.
Homeowner’s Insurance Requirements for the FHA 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.
