What's the required amount of coverage for a HO-6 condo policy with an FHA loan?
I am buying a condo with an FHA loan. My loan officer (who I suspect might be misinformed) told me that I need an HO-6 policy with a coverage amount equal to the amount of the loan. Everything that I have read online says that FHA only requires a minimum coverage amount of 20% of the appraised value of the condo. Can someone who really knows what they're talking about please tell me what amount of coverage I actually need?
- 9 years agoFavorite Answer
Your loan officer is misinformed. Loan companies like to have the entire value of their loan insured, but the policy is not written on the loan, On an HO-6 policy what is covered is the owners personal property and the building property 'studs in'. The appraised value includes things which are not insurable like market conditions and neighborhood and should not be used as a basis for the policy at all (excepting, of course, the actual 'improvements' value shown on some appraisal forms).
The best way to explain the difference is to imagine if you could pull the unit out of the building like a drawer and turn it upside down. What falls out is personal property, what stays in is building property. The building property includes floor coverings, paint, ceiling tiles, electrical and plumbing fixtures, cabinetry, built-in appliances, etc. The cost will fluctuate depending on the quality of the items and the area of the country in which you live, but usually runs between $30 - $45/sqft.
The best advice I can give is to check with a builder or insurance professional on what the cost would be for you and then get the policy, accordingly.
I hope this helps.
- AnonymousLv 79 years ago
You've got two issues going on.
First of all, it's NOT about the mortgage balance. You need to have BOTH the master policy showing studs-out coverage in the amount of 100% of the TOTAL value, AND the HO6 policy showing walls-in in the 20% amount for your unit.
But the second problem is convincing that loan officer he's wrong - and you'll have an easier time switching to a different lender, than convincing him.
The LOAN is based on the MARKET value of the unit - how much you could sell it for, or what it cost you to buy. The INSURANCE is based on the cost to FIX the unit. Those are completely different things, and mortgage requirements are for the cost to FIX the unit, not the cost to sell of the kitchen if there's a fire (because, hey, you can't sell off the kitchen and buy a new one at market value, if there's a fire. You have to fix it.) It's like comparing apples and kittens.
- Casey YLv 79 years ago
Haven't seen a question like this since before the housing market collapsed.
Most condo association master policies are written studs-in, but not all. You need to read your association bylaws to confirm this.
Anyway, the loan officer needs to show insurance covering the loan, which in this case is essentially impossible. You need to find another mortgage company, somewhere they actually have a brain and can understand the situation.