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Do homes purchased with an FHA home loan require hazard insurance? This is a common home loan question and one a borrower should take pains to sort out since such insurance can affect your bottom line when buying or building a home. 

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FHA Home Loans and Hazard Insurance: Is it Required?

October 1, 2020

FHA Home Loans and Hazard Insurance: Is it Required?
Do homes purchased with an FHA home loan or built using an FHA One-Time Close construction loan require hazard insurance?

This is a common home loan question and one a borrower should take pains to sort out since such insurance can affect your bottom line when buying or building a home. 

Borrowers who are new to the home loan process often get confused as to the differences between the FHA mortgage insurance premiums that are required as a part of the mortgage loan, and hazard insurance which is not always a requirement. 

FHA loan rules are not the only ones that must be recognized when buying a home--the lender’s standards will also apply. So even if you are unable to locate “chapter and verse” in the FHA loan rules regarding flood insurance, insurance that covers mudslides or forest fires, etc. you can’t assume your lender will NOT require such coverage.

If there are insurance requirements issued by the lender, that lender's standards would apply as long as the standards are in accordance with FHA loan guidelines, state law, and federal law. 

No National Standardization for Hazard Insurance Requirements

There is no national guideline for whether a lender should require hazard insurance or not, and specific types of insurance (including flood or fire insurance) will vary from state to state. Borrowers who want to purchase property in known flood zones will be required to carry flood insurance. 

You Can’t Always Insure Your Way to Loan Approval

Some at-risk regions of the country may still permit a borrower to purchase or build a home in a flood zone, earthquake country, areas known for forest fires, etc. But in some cases, no amount of insurance in the world will be enough to allow the purchase of a home. A good example? Certain FHA-defined special hazard zones such as a Special Flood Hazard Area.

According to HUD 4000.1, "If any portion of the property improvements (the dwelling and related Structures/equipment essential to the value of the Property and subject to flood damage) is located within a Special Flood Hazard Area (SFHA), the Mortgagee must reject the Property".

There MAY be exceptions under the right circumstances, but you will need to discuss your specific purchase with a loan officer to learn what may apply to you in your region.

How Much Insurance Is Enough?

The required minimum coverage amounts you may need will depend on the housing market, the lender, possibly even state law.Keep in mind that there is no single answer for the insurance question. You’ll have to do local research to see what the current market prices and required coverages might be, or discuss your concerns with your loan officer.

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