What Kind of Insurance Does the Bank Mortgage Require for Condominiums?
- When people purchase condominium units they are not purchasing the exterior building or the land underneath the building. They only purchase the interior of their unit. The exterior of the building, the common areas and the land underneath the complex are owned by the homeowners association. The homeowners association pays for the insurance on all of the areas other than the interior units. The mortgage lender requires a copy of the master insurance policy to ensure there sufficient coverage if the entire structure is destroyed.
- While the homeowner does not have to pay directly to replace the roof of the structure, the homeowner is responsible for everything on the inside of the home. This often includes the internal walls, cabinets, fixtures, appliances and personal property. Mortgage lenders require a homeowner provide an HO-6 policy, often covering 20 percent of the home's value. If the home is worth $100,000, a lender may reasonably request the borrower provide an HO-6 policy for $20,000 coverage. Should the condominium be destroyed, the interior of the condominium would be replaced with the borrower's HO-6 policy. An HO-6 policy also covers the borrower's personal liability in the home.
- Sometimes lenders require specialized coverage depending on the condominium's location. The lender may require proof of flood insurance if the condominium is in a federal flood zone. This protects the condominium complex and the lender's interest in the units should the building receive damage from floods. Florida has many condominium units in flood zones, which require flood insurance for financing. The lender may also require the homeowner obtain additional flood insurance for the interior of the property if it's not covered by the master flood insurance policy.
- Most of the major mortgage lenders including the Federal Housing Administration, Veterans Affairs, Fannie Mae and Freddie Mac approve entire condominium complexes. In addition to reviewing the insurance policies provided by the Homeowners Association, their review the financial stability of the condominium complex, the owner occupancy rates and other data before approving a loan in the condominium complex.