One of the nice things about VA loans as opposed to FHA loans and some conventional loans is that VA loans do not require the borrower to purchase private mortgage insurance, even with no down payment. It makes a lot of sense for the VA loan program to be this way; after all, the loan is already guaranteed to the fullest extent by the Department of Veterans Affairs, so what good would additional mortgage insurance do for either borrower or the lender? The purchase of additional mortgage insurance, especially the requirement to purchase it, would certainly be considered to be redundant and unnecessary. Mortgage insurance, however, is not the only kind of insurance to do with homes, and there are other types of insurance that may be required depending on the type of home the borrower is purchasing with their VA loan benefits.
One of these types of insurance is called hazard insurance. Hazard insurance is also known as homeowners insurance and protects against losses that might happen due to factors outside the homeowner’s control, such as fire, natural disasters, and theft. VA Pamphlet 26-7, or the VA Lenders Handbook, lists the requirements the VA has in regards to hazard insurance policies. The VA works through the lender and holds the lender accountable to make sure that the required hazard insurance is purchased for any VA-guaranteed homes. The requirements can vary depending on the location; homes in a known flood zone would be required to have insurance that covered flood damages, while homes in tornado alley would likely be required to have insurance that covered tornadoes.
But wait, there’s more. There are additional rules for condos and townhomes that are above and beyond the rules for typical suburban homes, and can actually be quite different from suburban home requirements. There are additional rules for condos and townhomes primarily because condo projects and homeowner’s associations have agreements that govern a great deal about the property. The handbook explains that many condo projects or homeowners associations take out blanket policies that cover all of the homes in the association. The specifics and limitations on that coverage should be well-detailed in the association’s documentation. From the Pamphlet: “Condominiums and many townhouse homeowners associations (HOAs) maintain blanket or master policies on common areas, including common mechanical and structural elements. The limits of coverage should be described in the policy, and may also be referred to in the organizational documents.”
There are, of course, times when the condo project or homeowners’ association has an insurance policy that covers all the homes, but the policy is below the VA standards for hazard insurance. In cases like these, the VA holds the lender responsible for taking action in securing additional hazard insurance that makes up for the disparity between the VA standards and the blanket policy of the homeowners’ association. The Pamphlet mentions that it is common for the HOA’s policies to only provide exterior coverage, and lists the things that they might not cover. From the Pamphlet: “Lenders should be aware that policies maintained by some HOAs may not provide adequate coverage. They may protect only the shell of the structure. These ‘studs out’ policies do not cover:
– interior walls
– plumbing or electrical fixtures
– heating, ventilation, and air conditioning (HVAC) equipment
– other items considered part of the real property”
According to the Pamphlet, the lender is responsible to look over the terms of the existing insurance policy and determine if it is adequate or not, then take measure to make sure that the proper insurance is obtained. From the Pamphlet: “Carefully review the terms of each blanket policy, or confirm with the HOA that adequate coverage is in effect (and check periodically for any changes in coverage). If coverage is inadequate, the homeowner can be held responsible through the terms of the loan instruments, for maintaining coverage on the portions of the real property not covered by the master policy.” Unfortunately for both lenders and borrowers, every situation involving condos and townhomes needs to be handled case-by-case, because the loan policies and other documentation can vary so widely from condo to condo. The best way to find out the requirements for your circumstances is to contact a VA-approved lender
for more information.