Why should I get fire and flood insurance for my condo/townhome?
One of the eternal mysteries in real estate is the fact that lenders don’t always require condo and townhome buyers to show proof of home insurance before they close. Nor do they generally require that the property be insured after closing. In contrast, when you buy a single family home, the lender insists on both. This is because if the house burns down they know they will lose the collateral they have for their loan. They also know that most home buyers won’t be making $2000 a month payments on a home that no longer exists after just losing all the personal property they had in the house.
Why the different insurance standard?
With few exceptions, the home owner’s association is required to maintain insurance on the buildings within the association. While the lender doesn’t care whether you’re insured, they do check to make sure that the HOA’s insurance is in place.
Why worry?
Because the HOA’s insurance generally covers only the exterior structure of the home, including framing, siding and roofing, that leaves what is probably at least 50% of the rebuilding cost to the home owner. If you’re that owner and your townhome burns to the ground, you’ll not only lose your personal property, you will need half the cost of reconstruction in cash or you won’t have anywhere to live or a marketable property to sell. Plus on the first of the month after the fire, the lender is going to expect to see your mortgage payment in their account. For most condo owners in this situation, the only available option is bankruptcy. For $50 to $100 or so a year, you can make sure you have the right insurance in place.
And if your property is in a high risk flood zone, don’t forget the flood insurance. Your HOA should have flood insurance to their standard insurance policies, but once again, this almost certainly only insures the structure and framing of the building. You are on the hook personally for any damage to the interior and to your personal property. At $100 to $200 bucks a year, you shouldn’t be “playing with fire” here either.
