The valuation for insurance purposes is found under the “cost" section
of your appraisal. You would take the total cost less the site value
(because your lot doesn’t burn down or get carried off in a flood, only
the structure does). This is the replacement value of your home and
that’s what they use to compensate you. Make sure that your $100,000 in coverage is enough to replace your home. These days appraisals that come in lower than the cost of building the home are unfortunately not uncommon. One appraiser recently explained to a group of real estate agents that he has stopped completing the replacement cost section of the appraisal because today’s prices are so far below replacement costs that the figure is meaningless for mortgage lending purposes.
Incidentally, many people make the mistake of overinsuring their property--for example, manufactured home buyers who automatically buy insurance for the entire property value when they only need to insure the dwelling. And lenders sometimes make the mistake of requiring more insurance than necessary. When working as a loan officer I had a processor claim that my client was underinsured. I had to dig up the Fannie Mae guideline showing that only the improvements need be insured; the value of the land does not.
Answer Submitted on Wed, Feb 4 2009
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