Home owner's insurance limit vs appraisal

We have a member whose mortgage balance, if approved, will exceed the insurable value of the home due to land to value issues. Can we require the member to purchase additional home owner's insurance to equal the value of the mortgage they are requesting? If we cannot require the extra insurance, is there any regulation that would prohibit the lender from denying the loan based on insufficient homeowner's insurance coverage? Thank you in advance for any advice you can provide.

ill exceed the insurable value of the home due to land to value issues.

Why wouldn't you deduct the land value for insurance purposes?

I agree - apples and oranges. If the house burns down, the replacement cost is the replacement cost. If lending on property in which the land values greatly exceed the improvement values, that is a business decision.

Hi Dan. That is a good question. I am in the compliance department and was asked this question by our lenders. I believe it is written in their policy to not deduct the land to value. It is certainly a question I can pose to them. My concern, being in compliance, is if a regulation existed prohibiting them from denying the loan due to insurance coverage issues. I couldn't find anything in my research but wanted another opinion.

Requiring a borrower to maintain insurance that greatly exceeds the replacement value of the structures is going to plop you down smack dab in the middle UDAAP country.

Hi Randy. I did read that states have laws prohibiting this practice and will be relaying this information to the lenders. I just want to be sure they can deny based on insurance coverage. I understand they can't require the increased coverage but can they just simply deny the loan at that point or is this also a UDAAP violation?

I am not sure why you would deny a loan for this reason. Is there something unique/special about this specific loan. Every building on a piece of property has a replacement cost value less the overall property value when the land value is included in the total value. You cannot insure the land on any transaction.

I might have a house that has a replacement cost value of $250,000 and it sits on 10 acres worth $5,000,000. You might loan me $2,000,000 - why would I need $2,000,000 in hazard insurance on the house.

I agree with Randy on the UDAAP issue.

If the acreage is worth 350,000 and the improvement is worth 400,000 and you loaned 600,000 then the improvement is still only worth 400,000 and regardless the amount of insurance you might require the policy will payout no more than 400,000.

You could deny based on them not being able to obtain the coverage you require but I would be careful denying it on the basis of the property value. It's not the borrower's fault you are requiring them to overinsure their property.

Thank you both for this useful information. I agree with the replacement cost. The land isn't going anywhere. I will certainly pass this information on to our lenders. Thank you again!