Deciphering the VA Lender’s Handbook Chapter 9 Part 12

The VA does require that homes purchased with a VA loan is covered by hazard insurance for the entire duration of the loan term. The type of hazard insurance and the amount required varies based on the risks and hazards present in the locality of the home. Rarely is there a case where the hazard insurance required by a VA loan is more than the types and amounts of coverage that are customary in a specific area. The VA also requires that all the amounts payable, including the unearned premiums, must be payable to the holder, or to a trustee of the holder. All of the policy payments received for insured losses must be applied to the restoration of the security or to the loan balance.

If the home you are buying is located in a Special Flood Hazard Area, then the VA will require that you purchase flood insurance. You can find out ahead of time on FEMA’s website if your home is located in an SFHA, and your lender will also most likely know if they are a local lender. The VA holds the lender accountable for making sure that the proper insurance is purchased, so don’t be surprised when your loan officer asks for evidence of the insurance or to speak with the insurance agent you purchased from. The Handbook has a list of points that are important to remember both for lenders and borrowers:

• The lender/holder’s responsibility extends through the entire term of the loan, and includes insuring any secured property that becomes newly located in a SFHA due to FEMA remapping.
• The VA appraiser’s opinion on whether the property is located in a SFHA does not relieve the lender from responsibility for ensuring flood insurance coverage on a property which is in fact located in a sfha.
• Personal property requiring coverage can include a manufactured home and its appliances, carpet, etc. if they secure the  loan.
• The amount of flood insurance must be equal to the lesser of the outstanding principal balance of the loan or the maximum limit of coverage available for the particular type(s) of property under the National Flood Insurance Act.
• Contact local property insurance agents or brokers, or FEMA regional offices, for current information on a maximum available coverage.

There is the chance that it may not be possible to either get or keep hazard insurance on the property. In these cases, the VA expects the lender to notify them and they will make a decision as to whether to waive the requirement for the property or to declare the loan to be in default, if it is an existing loan (as opposed to a new purchase). The VA considers hazard insurance to be very important, in that it protects the investment of all parties involved in the home purchase: the buyer, the lender, and the VA. If the lender does not comply with the VA’s requirements for making sure the borrower obtains hazard insurance, the VA may reduce the amount of guaranty they will pay on a claim that includes uninsured losses. When in doubt, the lender can consult the VA to find out the minimum required hazard insurance on the property, and the minimum can be obtained.

Things change a little bit when you move into a homeowners association (HOA) or a condominium, as most HOAs and condos have a blanket hazard insurance policy in place. While this blanket policy may be sufficient in some cases, usually it does not meet VA requirements since it only covers the shell of the structure (commonly referred to as a “studs out” policy). These policies often leave out interior walls, flooring, plumbing or electrical fixtures, cabinets, heating, ventilation, and air conditioning, appliances, and other items considered part of the property. Since these policies don’t cover the guts of the property, the borrower will usually be required to obtain their own hazard insurance policy to cover the rest of their house.

The lender will need a copy of the blanket policy to read it and determine what it does and does not cover. If you are purchasing the home, the seller can most likely provide you with a copy of the policy, and if you are refinancing, you can get one from your HOA’s administrator or the manager of the condo.