VA loans are different from both conventional and FHA loans in many respects; On a VA loan, a down payment is not required, and no private mortgage insurance (or PMI) is required even when there is no down payment. Unfortunately, there are many first-time home-buyers out there who get private mortgage insurance confused with hazard insurance (also known as homeowners insurance) and think that they’re off the hook for that as well. On a VA loan, however, whether the borrower is required to purchase hazard insurance depends on the property itself. The location of the property, including whether it is in an area where there are known hazards that could be present, is the single biggest determiner of whether hazard insurance is required. These hazards can be flood zones, a place where tornadoes are frequent, or other places where there is a significant risk of natural disasters.
The VA Lender’s handbook provides instructions for lenders on the subject of hazard insurance. It explains that the lender makes sure that the proper insurance for the property has been purchased and is maintained until the loan is paid off. It also says that the required insurance policy will be different property to property, and that usually the customary coverage in the area is sufficient. From the Handbook: “The lender is responsible for ensuring that hazard insurance is obtained prior to loan closing, and maintained for the term of the loan. It must be of a type or types and in an amount sufficient to protect the property against risks or hazards to which it may be subjected in the locality. Generally, the type(s) and amount of insurance coverage customary in the locality will satisfy this requirement.”
There are often differences between the hazard insurance that would be required for a condo or a townhome and what would be required for a typical suburban home, but there is one aspect in which all of the hazard insurance policies taken out on VA loans must have in common: the person who receives the payout if a claim is made on the insurance. The VA has made it very clear who that person needs to be. In the Handbook, it says that any hazard insurance policies need to be payable to the holder of the policy, and that the payments made on claims need to either go to fixing the damage on the property or to paying down the loan balance on the home. From the Pamphlet: “Policies must provide that all amounts payable, including unearned premiums, shall be payable to the holder, or to a trustee or other person for the holder. All policy payments received for insured losses must be applied to the restoration of the security or to the loan balance.”
The requirement for the payments being made to the holder of the policy is in the VA’s general requirements for all hazard insurance, regardless of the type of home being covered. The VA does also have more specific rules especially in regards to flood insurance. Floods are the most common hazards, and most homes require at least some form of flood insurance. As a matter of fact, the VA Lender’s Handbook has an entire section dedicated to explaining the requirements for flood insurance. They state that the lender is responsible for making sure that any needed flood insurance is obtained if the property is in a flood area. From the Pamphlet: “The lender is responsible for ensuring that flood insurance is obtained and maintained on any building or personal property that secures a VA loan if the property is located in a special flood hazard area (SFHA), as identified by the Federal Emergency Management Agency (FEMA).”
Hazard insurance is not a joking matter when it comes to VA loans. VA-approved lenders, and the VA itself are very unbendable on the matter of hazard insurance. There is good reason for this – after all, the lender and the VA are both investing in your home more than you are for the time being, until you’ve built up enough equity in your home to surpass the equity the lender has in it. They obviously want to protect their investment in case you default or if something happens to the property.