Uninsurable Property: What it is, How it Works, Private Insurance
What Is Uninsurable Property?
Uninsurable property is a home that is not eligible for insurance through the Federal Housing Administration (FHA) because it needs extensive repairs. An uninsurable property is typically ineligible for a mortgage through the FHA. However, the individual purchasing the home may qualify for alternative FHA financing options in some circumstances.
More generally, uninsurable property may refer to any real estate or other personal property that an insurer decides not to cover.
Key Takeaways
- In the housing market, an uninsurable property is one that the FHA refuses to insure.
- Most often, this is due to the home being in unlivable condition and/or needing extensive repairs.
- While the FHA will not insure such homes, private insurance companies may, but will typically come with higher premiums due to the property's added risk.
Understanding Uninsurable Property
The Federal Housing Administration (FHA) is overseen by the U.S. Department of Housing and Urban Development (HUD). The FHA insures mortgage loans to protect lenders against default, allowing FHA-approved mortgage lenders to offer more attractive options, such as a 3.5% downpayment versus the traditional 20%.
The insurance and mortgages offered through FHA come with certain requirements on the condition of the property in the transaction. If the repairs required to meet those requirements exceed the FHA's limit, the property will not be accepted into the program. In general, the property must meet the minimum property requirements, meaning the home must be safe, sound, and secure.
Typically, an appraiser and inspector will come out to verify that the requirements have been met, which include:
- A sufficient supply of safe running water, including hot water
- Sanitary facilities and a safe method of sewage disposal
- One bathroom with shower or bathtub
- Adequate heating for healthy living conditions
- Electricity adequate for lighting and mechanical equipment
- Functioning kitchen with sink, running water, and stove
Some of the issues that could prevent insuring a property might include:
- Damp basements or water against the foundation
- Defective plumbing or electrical systems
- Foundation issues such as cracked walls, bulging, structural damage
- Leaking or damaged roof
Repairs on housing may be necessary because of damage from fires, storms, or age that has made parts of the property fall below standards.
Tip
To qualify for an FHA Loan borrowers must have a minimum credit score of 580, make a downpayment of at least 3.5% of the home's purchase price, and obtain mortgage insurance.
How Uninsurable Property Is Treated by Private Sector Insurers
Other insurers besides the FHA might not insure a property because of specific items that must be tended to, such as dead trees or ones that pose a risk of collapse on the property and need to be removed. Exposed and outdated wiring and other infrastructure issues could cause an insurer to deny coverage. The presence of a swimming pool could pose an issue that insurers may not want to cover unless the property includes certain features, such as a fence to enclose and secure the pool from outsiders.
When a home is inspected in conjunction with a sale, an inspector will assess the property. However, it may still be necessary to ask direct questions about the insurability of the home and any issues that stand out. If a homebuyer does not remain attentive to such problematic possibilities, they may be caught in a deal for a property they cannot secure insurance for. If the property owner plans to make repairs to come into compliance, there may be policies available that cover the presence of workers who will be on the property to make those repairs.
FHA 203K Loan
As stated earlier, the Department of Housing and Urban Development (HUD) homes must be appraised and inspected before they can be listed. The homes typically fall into one of three categories: insurable, insurable with repair escrow or uninsurable. Any HUD home that is uninsurable will generally have to secure other-than-FHA financing.
However, in certain instances, HUD will provide financing for purchasing an uninsurable property through its FHA 203K loan financing program. These are rehab mortgages where the lender rolls the repair costs into the mortgage. These homes usually sell at a large discount and are not offered through conventional financing because of their condition.
Some of the repairs covered by the FHA 203K loan include:
- Replacing the roof
- Updating for health and safety standards
- Structural improvements
- Flooring
- Electrical, plumbing, and appliances
- Landscaping and driveway
- Making the home wheelchair accessible
There are two 203K loan programs that include the standard 203K loan for major repairs and the limited 203K loan for minor repairs capped at $35,000.
What Is Needed for a House to be Insurable for an FHA Loan?
For a property to be accepted into the FHA program, it must meet the FHA's minimum property requirements, which include the home must be safe, sound, and secure.
What Would Fail an FHA Loan Inspection?
An FHA appraisal and inspection would likely fail if there were signs of structural damage, foundation issues, a pest infestation, or health and safety issues.
What Improvements Can You Use a 203K Loan For?
A 203K loan cannot be used for extravagant items such as a swimming pool. However, it can be used for major repairs, including the electrical, plumbing, roof, landscaping, and appliances.
The Bottom Line
The Federal Housing Administration (FHA) insures mortgage loans, allowing borrowers to benefit from a lower down payment. However, there are minimum property requirements, including the home must be safe, sound, and secure. If serious issues exist with the home or property, the FHA will consider the home uninsurable. Borrowers would need to contact private insurers to cover the property, or a 203K loan could be used to make the necessary repairs.