I'm considering buying a home that requires flood insurance where the
mortgage would be around $300,000.

Let's say the replacement value of the house is above $250,000 for
arguments sake.

My question is how would a bank allow the mortgage since the
replacement value of the house is less than the coverage amount of
$250,000 as specified by FEMA? Would their be risk to the bank that
the house washes away and presents a deficit?

The home replacement in my case is below $250,000 however. My concern
is that upgrades to the property and future increases in home
values/construction costs would eventually generate a situation where
the house is not fully covered for me, the homeowner. The bank would
be covered by the mortgage in my case BUT what if I tried to sell the
property? The next owner may not be able to get a mortgage because of
the coverage gap and thus my home value would be depressed.

Comments are appreciated!

"nonbuyer" wrote in message
oups.com...
I'm considering buying a home that requires flood insurance where the
mortgage would be around $300,000.

Let's say the replacement value of the house is above $250,000 for
arguments sake.

My question is how would a bank allow the mortgage since the
replacement value of the house is less than the coverage amount of
$250,000 as specified by FEMA? Would their be risk to the bank that
the house washes away and presents a deficit?

The home replacement in my case is below $250,000 however. My concern
is that upgrades to the property and future increases in home
values/construction costs would eventually generate a situation where
the house is not fully covered for me, the homeowner. The bank would
be covered by the mortgage in my case BUT what if I tried to sell the
property? The next owner may not be able to get a mortgage because of
the coverage gap and thus my home value would be depressed.

You seem to have a defective understanding of
mortgages and insurance. Take your questions
to a mortgage lender and your insurance agent
respectively. Both will explain that your property
insurance has no bearing on any sale of the house
to another party. (His mortgage-worthiness depends
on his credit history, not your insurance.)

--
Don Phillipson
Carlsbad Springs
(Ottawa, Canada)

In article .com,
says...

Let's say the replacement value of the house is above $250,000 for
arguments sake.

My question is how would a bank allow the mortgage since the
replacement value of the house is less than the coverage amount of
$250,000 as specified by FEMA? Would their be risk to the bank that
the house washes away and presents a deficit?

Your insurance agent faxes in proof of insurance stating that your home
is insured to the maximum available under NFIP. The lender usually
accepts that because they know NFIP won't write higher limits.

Your homeowners insurance will still be required to cover you for,
typically, the full replacement value of the home, or the balance of the
loan. But flood insurance is a different animal entirely thanks to
NFIP.

There has been talk, again, of increasing the maximum dwelling coverage
available under NFIP, now that many homes are well above $250,000
replacement cost. But the budgetary impact would be significant unless
there's a rate increase to go along with it.

--
is Joshua Putnam
http://www.phred.org/~josh/
Updated Bicycle Touring Books List:
http://www.phred.org/~josh/bike/tourbooks.html

In article ,
says...

Both will explain that your property
insurance has no bearing on any sale of the house
to another party. (His mortgage-worthiness depends
on his credit history, not your insurance.)

If the buyer is unable to insure the house for at least the lesser of
balance of the loan or the replacement cost of the home, then the bank
generally won't accept the mortgage.

e.g. if a home is selling for $400,000, with a $350,000 mortgage and a
replacement cost of $300,000, the lender will generally require
insurance of at least $300,000 replacement cost.

Within the U.S., flood insurance is an exception to this rule: because
the federal flood insurance program will not insure homes for more than
$250,000, lenders will generally accept insurance for that amount, even
if the home is worth more than that.

--
is Joshua Putnam
http://www.phred.org/~josh/
Updated Infrared Photography Gallery:
http://www.phred.org/~josh/photo/ir.html

On Fri, 28 Jul 2006 21:55:51 -0700, Joshua Putnam
wrote:

In article ,
says...

Both will explain that your property
insurance has no bearing on any sale of the house
to another party. (His mortgage-worthiness depends
on his credit history, not your insurance.)

If the buyer is unable to insure the house for at least the lesser of
balance of the loan or the replacement cost of the home, then the bank
generally won't accept the mortgage.

e.g. if a home is selling for $400,000, with a $350,000 mortgage and a
replacement cost of $300,000, the lender will generally require
insurance of at least $300,000 replacement cost.


I don't think so and here's why but good question by the OP.
Hint: think about this as if you were the lender !

The " lender " will want to make sure the insurance covers the loan
balance (the net amt. of money he loaned you) and doesn't care about
the market value or replacement value of the home. Of course, the
homeowner might.

This brings up some other questions but I won't get into it here.

// doug //
website: MyHomeRebate.com
"Buy New Homes for Less in Texas"

I've been in contact with the mortgage broker and my insurance agent in
attempt to understand the nuances of this scenario. They have
contradicted each other with their answers so far.

The mortgage company told me that I will have full replacement value
through insurance but it will cost extra. They said my insurance
company will understand.

The insurance man said this is not true unless there is something that
he doesn't know. He is still in process of contacting the flood
department to see if any full replacement option is possible. The max
that the flood insurance can cover is the 250k, which could be less
than full replacement.

I like the answers provided that say that as long as the maximum
coverage is obtained the mortgage will be granted. How else would
people buy expensive homes off in these usually lush locations without
this being the case? Maybe they only have mortgages less than 250k?
However, the post suggesting the lenders view of the situation by doug
is what I think is correct. Mortgage companies would not put
themselves in risk for no good reason.

I'm still waiting for the insurance agent to reconnect with me to
fill me in with the info from their flood department. Maybe
supplemental insurance exists. I'm skeptical on the answers provided
by the mortgage broker because the point is mute to them. My real life
case will certainly place the full replacement value of the structure
less than 250k.

BTW, off topic; for those interested in flood insurance coverage. My
insurance agent didn't mention options in coverage yet but I only
asked for a preliminary quote. I have read
(http://www.fema.gov/pdf/nfip/mandpur1.pdf ) that different deductible
levels exist that can greatly effect the premiums. For example a five
thousand dollar deductible might be a good option for areas that very
rarely flood or when most of the home is safe from damage. When I
called for a quote the agent never asked about deductible amounts.
This document outlines the standard deductible amount is $750. Min is
$500 - max is $5000.

Thanks for the responses.

MyHomeRebate.com wrote:
On Fri, 28 Jul 2006 21:55:51 -0700, Joshua Putnam
wrote:

In article ,
says...

Both will explain that your property
insurance has no bearing on any sale of the house
to another party. (His mortgage-worthiness depends
on his credit history, not your insurance.)

If the buyer is unable to insure the house for at least the lesser of
balance of the loan or the replacement cost of the home, then the bank
generally won't accept the mortgage.

e.g. if a home is selling for $400,000, with a $350,000 mortgage and a
replacement cost of $300,000, the lender will generally require
insurance of at least $300,000 replacement cost.


I don't think so and here's why but good question by the OP.
Hint: think about this as if you were the lender !

The " lender " will want to make sure the insurance covers the loan
balance (the net amt. of money he loaned you) and doesn't care about
the market value or replacement value of the home. Of course, the
homeowner might.

This brings up some other questions but I won't get into it here.

// doug //
website: MyHomeRebate.com
"Buy New Homes for Less in Texas"

In article ,
MyHomeRebate.com says...
On Fri, 28 Jul 2006 21:55:51 -0700, Joshua Putnam
wrote:

In article ,
says...

Both will explain that your property
insurance has no bearing on any sale of the house
to another party. (His mortgage-worthiness depends
on his credit history, not your insurance.)

If the buyer is unable to insure the house for at least the lesser of
balance of the loan or the replacement cost of the home, then the bank
generally won't accept the mortgage.

e.g. if a home is selling for $400,000, with a $350,000 mortgage and a
replacement cost of $300,000, the lender will generally require
insurance of at least $300,000 replacement cost.


I don't think so and here's why but good question by the OP.
Hint: think about this as if you were the lender !

Actually, I think of it as if I'm the insurance agent, reading the
binder requests the lenders fax to my office.

The " lender " will want to make sure the insurance covers the loan
balance (the net amt. of money he loaned you) and doesn't care about
the market value or replacement value of the home. Of course, the
homeowner might.

The lender might like to over-insure the house to cover the full amount
of the loan, but it's illegal for them to request and illegal for the
insurance company to provide, at least in most states. (Over-insurance
is a 'moral hazard' issue, it creates an incentive for the homeowner to
burn their own house -- buy a house, burn it down, get insurance for the
full value of the loan, and you come out owning the land free and clear.
So I can't insure a 600 square foot cabin for the full purchase price
including its 1.5 acre lot.)

The lender's actual request is typically that the insurance provide full
replacement coverage on the home *or* the balance of the loan, whichever
is less.

Sometimes a novice clerk processing the loan underwriting will come back
with a demand to cover the full value of the loan, but a supervisor will
quickly retract any illegal demands.


Disclaimer: insurance laws vary by state, this is not specific advice,
just general commentary. I'm not your insurance agent unless you have
my agency shown on your paperwork.

--
is Joshua Putnam
http://www.phred.org/~josh/
Updated Bicycle Touring Books List:
http://www.phred.org/~josh/bike/tourbooks.html

On Mon, 31 Jul 2006 15:28:25 -0700, Joshua Putnam
wrote:

In article ,
MyHomeRebate.com says...
On Fri, 28 Jul 2006 21:55:51 -0700, Joshua Putnam
wrote:

In article ,
says...

Both will explain that your property
insurance has no bearing on any sale of the house
to another party. (His mortgage-worthiness depends
on his credit history, not your insurance.)

If the buyer is unable to insure the house for at least the lesser of
balance of the loan or the replacement cost of the home, then the bank
generally won't accept the mortgage.

e.g. if a home is selling for $400,000, with a $350,000 mortgage and a
replacement cost of $300,000, the lender will generally require
insurance of at least $300,000 replacement cost.


I don't think so and here's why but good question by the OP.
Hint: think about this as if you were the lender !

Actually, I think of it as if I'm the insurance agent, reading the
binder requests the lenders fax to my office.


Ok and perhaps that is fine where you are but I think of it as I am
the lender because I owner-finance homes in Texas and have lawyers
draw up the legal papers for me for closings. Then I require the
homeowner's to meet the conditions of those legal papers or they face
foreclosure. I don't fax in requests for the borrower (even if I do
escrow for them). Should the borrower insure for more than the note,
that is fine with me but I am not liable for that because I had no
involvment. They fax in their own requests and either I'm listed as
mortgagee or I get verification of insurance so I can read them, to be
sure they meet the proper terms as a minimum.



// doug //
website: MyHomeRebate.com
"Buy New Homes for Less in Texas"

Where I am, the replacement cost of existing houses is far in
excess of their market value. This leads to the following
reasoning. If the house is an investment, then insure for the
(lower) full market value. If the house is your home and you
would rebuild it if it were destroyed, then pick your target
replacement cost and insure for that much. The premium is
based on the potential payout from the insurance policy, not
on what the house may be worth.

Re the OP's question, "How would I get a mortgage over the
amount covered by flood insurance?", it seems to me the trick
is to avoid being UNDERinsured. So I would ask "How can I
increase my flood insurance to cover the value of my house?"

Una

In article ,
MyHomeRebate.com says...
On Mon, 31 Jul 2006 15:28:25 -0700, Joshua Putnam
wrote:

In article ,
MyHomeRebate.com says...
On Fri, 28 Jul 2006 21:55:51 -0700, Joshua Putnam
wrote:

In article ,
says...

Both will explain that your property
insurance has no bearing on any sale of the house
to another party. (His mortgage-worthiness depends
on his credit history, not your insurance.)

If the buyer is unable to insure the house for at least the lesser of
balance of the loan or the replacement cost of the home, then the bank
generally won't accept the mortgage.

e.g. if a home is selling for $400,000, with a $350,000 mortgage and a
replacement cost of $300,000, the lender will generally require
insurance of at least $300,000 replacement cost.


I don't think so and here's why but good question by the OP.
Hint: think about this as if you were the lender !

Actually, I think of it as if I'm the insurance agent, reading the
binder requests the lenders fax to my office.


Ok and perhaps that is fine where you are but I think of it as I am
the lender because I owner-finance homes in Texas and have lawyers
draw up the legal papers for me for closings. Then I require the
homeowner's to meet the conditions of those legal papers or they face
foreclosure.

Do you ever request coverage higher than the replacement cost of the
dwelling, e.g. if it's a small home on a valuable lot?

Texas is one of the states that specifically prohibits requiring
insurance in excess of replacement cost:

§ 549.0551. REQUIRING CERTAIN AMOUNTS OF COVERAGE. (a) A
lender may not require as a condition of financing a residential
mortgage or providing other financing arrangements for residential
property, including a mobile or manufactured home, that a borrower
purchase homeowners insurance coverage, mobile or manufactured
home insurance coverage, or other residential property insurance
coverage in an amount that exceeds the replacement value of the
dwelling and its contents, regardless of the amount of the mortgage
or other financing arrangement entered into by the borrower.
(b) For purposes of this section, a lender may not include
the fair market value of the land on which a dwelling is located in
the replacement value of the dwelling and its contents.

I don't fax in requests for the borrower (even if I do
escrow for them).

Most lenders would much rather get the lienholder clause entered
correctly the first time, that's why they fax it directly to the
insurance agency.

Should the borrower insure for more than the note,
that is fine with me but I am not liable for that because I had no
involvment.

The law doesn't care how their insurance compares to the note, only to
the value -- it's illegal to require over-insurance. If you're
financing a cheap house on a nice lot, you can't legally require
coverage for more than the replacement cost of the cheap house.

--
is Joshua Putnam
http://www.phred.org/~josh/
Books for Bicycle Mechanics and Tinkerers:
http://www.phred.org/~josh/bike/bikebooks.html

On Tue, 1 Aug 2006 00:14:27 -0700, Joshua Putnam
wrote:

In article ,
MyHomeRebate.com says...
On Mon, 31 Jul 2006 15:28:25 -0700, Joshua Putnam
wrote:

In article ,
MyHomeRebate.com says...
On Fri, 28 Jul 2006 21:55:51 -0700, Joshua Putnam
wrote:

In article ,
says...

Both will explain that your property
insurance has no bearing on any sale of the house
to another party. (His mortgage-worthiness depends
on his credit history, not your insurance.)

If the buyer is unable to insure the house for at least the lesser of
balance of the loan or the replacement cost of the home, then the bank
generally won't accept the mortgage.

e.g. if a home is selling for $400,000, with a $350,000 mortgage and a
replacement cost of $300,000, the lender will generally require
insurance of at least $300,000 replacement cost.


I don't think so and here's why but good question by the OP.
Hint: think about this as if you were the lender !

Actually, I think of it as if I'm the insurance agent, reading the
binder requests the lenders fax to my office.


Ok and perhaps that is fine where you are but I think of it as I am
the lender because I owner-finance homes in Texas and have lawyers
draw up the legal papers for me for closings. Then I require the
homeowner's to meet the conditions of those legal papers or they face
foreclosure.

Do you ever request coverage higher than the replacement cost of the
dwelling, e.g. if it's a small home on a valuable lot?


No, just want the note / remaining balance to be covered. I owner
finance typical properties which the lot is appraised for about 15 to
20 percent of the total.

Texas is one of the states that specifically prohibits requiring
insurance in excess of replacement cost:

§ 549.0551. REQUIRING CERTAIN AMOUNTS OF COVERAGE. (a) A
lender may not require as a condition of financing a residential
mortgage or providing other financing arrangements for residential
property, including a mobile or manufactured home, that a borrower
purchase homeowners insurance coverage, mobile or manufactured
home insurance coverage, or other residential property insurance
coverage in an amount that exceeds the replacement value of the
dwelling and its contents, regardless of the amount of the mortgage
or other financing arrangement entered into by the borrower.
(b) For purposes of this section, a lender may not include
the fair market value of the land on which a dwelling is located in
the replacement value of the dwelling and its contents.


This law is really meant for unique property or situations but you
cite a valid Texas law.


I don't fax in requests for the borrower (even if I do
escrow for them).

Most lenders would much rather get the lienholder clause entered
correctly the first time, that's why they fax it directly to the
insurance agency.


I don't like that idea from a legal standpoint so I don't take short
cuts.


Should the borrower insure for more than the note,
that is fine with me but I am not liable for that because I had no
involvment.

The law doesn't care how their insurance compares to the note, only to
the value -- it's illegal to require over-insurance. If you're
financing a cheap house on a nice lot, you can't legally require
coverage for more than the replacement cost of the cheap house.

Agreed in Texas but this law is for a unique type of property or
situation but worth mentioning for the sake of this discussion.

Thanks.


// doug //
website: MyHomeRebate.com
"Buy New Homes for Less in Texas"

On Tue, 1 Aug 2006 00:14:27 -0700, Joshua Putnam
wrote:

In article ,
MyHomeRebate.com says...
On Mon, 31 Jul 2006 15:28:25 -0700, Joshua Putnam
wrote:

In article ,
MyHomeRebate.com says...
On Fri, 28 Jul 2006 21:55:51 -0700, Joshua Putnam
wrote:

In article ,
says...

Both will explain that your property
insurance has no bearing on any sale of the house
to another party. (His mortgage-worthiness depends
on his credit history, not your insurance.)

If the buyer is unable to insure the house for at least the lesser of
balance of the loan or the replacement cost of the home, then the bank
generally won't accept the mortgage.

e.g. if a home is selling for $400,000, with a $350,000 mortgage and a
replacement cost of $300,000, the lender will generally require
insurance of at least $300,000 replacement cost.


I don't think so and here's why but good question by the OP.
Hint: think about this as if you were the lender !

Actually, I think of it as if I'm the insurance agent, reading the
binder requests the lenders fax to my office.


Ok and perhaps that is fine where you are but I think of it as I am
the lender because I owner-finance homes in Texas and have lawyers
draw up the legal papers for me for closings. Then I require the
homeowner's to meet the conditions of those legal papers or they face
foreclosure.

Do you ever request coverage higher than the replacement cost of the
dwelling, e.g. if it's a small home on a valuable lot?

Texas is one of the states that specifically prohibits requiring
insurance in excess of replacement cost:

§ 549.0551. REQUIRING CERTAIN AMOUNTS OF COVERAGE. (a) A
lender may not require as a condition of financing a residential
mortgage or providing other financing arrangements for residential
property, including a mobile or manufactured home, that a borrower
purchase homeowners insurance coverage, mobile or manufactured
home insurance coverage, or other residential property insurance
coverage in an amount that exceeds the replacement value of the
dwelling and its contents, regardless of the amount of the mortgage
or other financing arrangement entered into by the borrower.


In addition to my last post, I might add that this law is valid for a
loan just about to start and not for a loan in existence.

// doug //
website: MyHomeRebate.com
"Buy New Homes for Less in Texas"

As the sale progresses, I'm learning more. I just got a document from
the bank that had me sign off on the flood insurance. It stated that I
need to have flood insurance for the replacement value of the home OR
to the maximum allowed (typically $250,000.) If the replacement value
is greater than the maximum then they recommend I seek out private
insurance for the non-insured portion of the home.

Thanks for all the comments.



nonbuyer wrote:
I'm considering buying a home that requires flood insurance where the
mortgage would be around $300,000.

Let's say the replacement value of the house is above $250,000 for
arguments sake.

My question is how would a bank allow the mortgage since the
replacement value of the house is less than the coverage amount of
$250,000 as specified by FEMA? Would their be risk to the bank that
the house washes away and presents a deficit?

The home replacement in my case is below $250,000 however. My concern
is that upgrades to the property and future increases in home
values/construction costs would eventually generate a situation where
the house is not fully covered for me, the homeowner. The bank would
be covered by the mortgage in my case BUT what if I tried to sell the
property? The next owner may not be able to get a mortgage because of
the coverage gap and thus my home value would be depressed.

Comments are appreciated!