Do I need REPLACEMENT COST Insurance for a Conventional Loan?

[Daniel Kong]

I'm in the process of purchasing a property worth about 100k using conventional financing. Do I need to buy Homeowners insurance for the replacement of the home (quoted at 530k), or can I just get Insurance to cover the 100k purchase price? It doesn't make sense to me to spend 530k to replace a home that will be worth 100k after its done. Just wondering what my options are. 

[Jason Bott]

@Daniel Kong first, find out what your loan will require.  That will dictate what options you have.

If the loan requires a Replacement Cost policy, most insurance companies will require you to insure to Replacement Cost for the policy to offer Replacement Cost coverage.

1 work around is to find a company who can write a Replacement Cost policy using  Agreed Value or Functional Replacement Cost, instead of Replacement Cost.  These 2 forms give you some flexibility in setting the value of the building.

Keep in mind, not many companies will want to do this, and even when you find some that will, the premium may still be higher than a staright forward Replacment Cost policy.