1. Answers
  2. Insurance Basics

Do I have to over-insure my home to satisfy my lender?

Is your mortgage company asking you to increase coverage to "cover the amount of the loan"? Don't do it.

In Virginia and many other states, lenders do not have the right to require you to over-insure your home just to make the Dwelling amount of coverage exceed the loan amount.

Here is the scenario.  You buy a house for $300,000.  For the sake of the example, we will assume that you get a mortgage for the entire $300,000.  Your insurance agency develops a replacement cost estimate of $250,000 on the structure itself and (properly) insures the dwelling for that amount.  Your lender wants you to increase your coverage to $300,000 to "cover the loan amount".  You DON'T have to spend extra money over-insuring your home in this way.

Why would the replacement cost be lower than the purchase price?  Several factors could cause this. 

#1 is the value of your land.  You do not have to insure the value of your land.  If a fire, hurricane, or whatever hits, the land will still be there, even if the house has to be rebuilt.

#2 is that the sale price has to do with MARKET VALUE (what it would likely sell for) where insurance is concerned with REPLACEMENT COST (what it would cost to rebuild).  Those 2 figures do not always track the same.

No matter what the reason for the difference is, the Commonwealth of Virginia protects homeowners from being required to OVER insure.  VA state code says:

No lender shall require a borrower, as a condition to receiving or maintaining a loan secured by any mortgage or deed of trust, to provide or purchase property insurance coverage or flood insurance coverage against risks to any improvements on any real property in an amount exceeding the replacement value of the improvements on the real property.

§ 6.2-412. Insurance coverage under certain loans not to exceed replacement value of improvements.

Similar rules apply to many other states - see here

Keep in mind, your lender is not trying to make things difficult for you.  They have a genuine interest in making sure that you are properly covered.  They also don't want to hold up your closing and may not be aware of the laws in Virginia.  If you have a replacement cost estimate on your appraisal that is in line with your insurance amount, that may be enough to satisfy their requirement as well.

So, be patient with them and if you need any assistance, please contact us.  We would be happy to help.