Buying a Condo or Townhome in a San Diego Fire-Risk Area? Check the HOA Insurance Before You Make an Offer

When buying a condo or townhome in San Diego, most buyers know they should review the HOA’s finances, rules and monthly dues.

There is another document that deserves attention—especially in communities with elevated wildfire exposure:

The HOA’s master insurance policy.

In California’s changing insurance market, the type of coverage an HOA carries, the amount of coverage and even the policy deductible can affect more than the association itself. They can potentially affect whether a buyer’s lender can finance the property.

I recently represented a buyer in Santee where exactly that happened.

How HOA Insurance Can Become a Mortgage Issue

With a detached home, buyers generally obtain their own homeowners insurance policy.

Condos and townhomes can be different. The homeowners association typically maintains a master insurance policy covering certain portions of the buildings and common areas. Depending on the loan program and investor purchasing the mortgage, that policy must meet specific requirements.

That means a buyer can be financially qualified for a mortgage—and the individual property can appraise at the appropriate value—but the loan can still encounter a problem because of the HOA’s insurance.

That was the situation with my buyer.

A Santee Townhome Purchase That Hit an Unexpected Financing Problem

My client was purchasing a townhome in Santee in an area with higher wildfire exposure.

During the lender’s review of the HOA documents, the association’s master insurance policy became an issue.

The community was insured through the California FAIR Plan with a 10% deductible. The investor originally selected for my buyer’s mortgage required the HOA’s insurance deductible to be 5% or less.

The loan therefore could not proceed as originally structured.

The California FAIR Plan provides basic property insurance coverage for properties when traditional insurance coverage is difficult to obtain. Buyers can learn more directly from the California FAIR Plan.

Then the Financing Problem Became a Cost Problem

The lender found another way to finance the purchase, but it required moving the buyer into a non-conforming loan.

By that point, interest rates had increased from the rate my buyer had originally locked.

The buyer was now facing an unexpected financial consequence from something completely outside their control: the HOA’s master insurance policy had changed the available financing, and the replacement loan came with a higher interest rate.

Accepting that additional cost wasn’t the only option.

Instead, we looked at whether the transaction could be restructured.

We Calculated the Cost of Getting the Buyer Back to Their Expected Rate

I worked closely with the lender while the insurance issue was investigated and the replacement financing was structured.

We determined how much it would cost in loan discount points to bring the buyer’s new interest rate back to approximately the rate they had originally expected.

The cost was approximately $17,000.

Rather than simply allowing my buyer to absorb that additional expense because of the HOA insurance issue, I went back to the seller and negotiated.

The Seller Agreed to Pay Approximately $17,000 in Loan Points

The seller agreed to cover the cost of the discount points.

That allowed us to keep the transaction together, protect my buyer from the unexpected increase in financing costs and successfully close the purchase.

It is a good example of why buyer representation involves much more than finding a property and writing an offer. When something unexpected threatens a transaction, the job becomes understanding the problem, coordinating with the appropriate professionals and determining where there may still be room to negotiate.

Why San Diego Condo and Townhome Buyers Should Pay Attention

Wildfire exposure is an increasingly important consideration when purchasing property in San Diego County, but it is important to distinguish between a designated fire hazard zone and an individual property’s insurance risk.

CAL FIRE designates Fire Hazard Severity Zones as Moderate, High or Very High based on factors including vegetation, terrain, fire history, potential flame length, embers and typical fire weather.

These maps identify wildfire hazard. They do not determine the specific insurance risk, premium or availability of coverage for an individual property.

Buyers can review California’s current Fire Hazard Severity Zone maps through CAL FIRE to learn more about the area surrounding a property they are considering.

What Should Buyers Investigate Before Purchasing?

If you are considering a San Diego condo or townhome—particularly in a community where wildfire exposure or insurance availability may be a concern—make the HOA’s insurance part of your due diligence early.

Questions worth asking include:

• What type of master insurance policy does the HOA currently carry?
• What are the master policy deductibles?
• Does the policy meet the requirements of your specific loan program and lender?
• Does the lender or mortgage investor have additional insurance requirements?
• Has the HOA recently experienced substantial insurance premium increases, reduced coverage or difficulty obtaining coverage?
• Is the association using the California FAIR Plan or supplemental coverage?
• Could the master insurance policy affect conventional, VA or other financing options for the property?

The important point is not to assume that because an HOA has insurance, the property will automatically satisfy every lender’s requirements.

Fire Risk Isn’t Just an Insurance Question

For San Diego buyers, wildfire exposure is often discussed as a question of whether a home can be insured and what that insurance will cost.

For condos and townhomes, there can be another layer:

The HOA’s insurance can become a financing issue.

And when financing changes during escrow, the consequences can include a different loan program, a different interest rate, additional closing costs or, in some cases, difficulty closing at all.

That doesn’t necessarily mean buyers should avoid properties in communities with wildfire exposure. It means these purchases may require more careful due diligence before and during escrow.

My Santee buyer ultimately purchased the home. But getting there required identifying the HOA insurance problem, working closely with the lender on an alternative and negotiating with the seller when the new financing created an unexpected cost.

The seller’s agreement to contribute approximately $17,000 toward the loan points helped bring the buyer’s rate back toward what they had originally expected and allowed the transaction to close.

For buyers considering condos and townhomes throughout San Diego County, it is a useful reminder:

Don’t just ask what the HOA fee is. Ask what the HOA insurance looks like, too.

Want to Know if the Property You’re Considering Is in a Fire Zone?

Wildfire exposure can affect insurance, HOA coverage and, in some cases, your financing options.

If you’re considering a home, condo or townhome in San Diego, I can help you identify the property’s fire hazard zone and understand what questions to ask about insurance and financing before you move forward.

Send me the property address and I’ll help you take a closer look.

Alexis “Lexie” Dindal
REALTOR® | Associate Broker
Military Relocation, Listing & VA Specialist
300+ Sales | 25+ Years of Experience