[TheBank]

We have a loan to purchase land with a barn. The barn is the only improvement and is located in a SFHA. We are requiring flood insurance. At maturity we will renew the land loan and loan funds to build a home on that property that will not be located in a SFHA. This loan will be a 1 year construction loan that will be refinanced into an ARM loan at maturity for the permanent financing phase.

The barn is not used for income nor will it be attached to the home, nor will it have a bedroom, bathroom, or kitchen. I believe the barn will be exempt from flood insurance during the permanent financing phase because it will meet the detached structure exemption, is that correct?

During the 1 year construction loan phase, is insurance required on the barn? There is not a home on the property yet during that loan, but it is in process of being built during that loan. Would the barn be exempt during the construction phase? There is no home yet to be detached from, but it would be in process though.

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[rcooper]

The detached structure exemption in 339.4(c) states:

The flood insurance requirement prescribed by § 339.3 does not apply with respect to:
Any structure that is a part of any residential property but is detached from the primary residential structure of such property and does not serve as a residence. For purposes of this paragraph (c):

(1) “A structure that is a part of a residential property” is a structure used primarily for personal, family, or household purposes, and not used primarily for agricultural, commercial, industrial, or other business purposes;

(2) A structure is “detached” from the primary residential structure if it is not joined by any structural connection to that structure; and

(3) “Serve as a residence” shall be based upon the good faith determination of the FDIC-supervised institution that the structure is intended for use or actually used as a residence, which generally includes sleeping, bathroom, or kitchen facilities.

The regulators didn’t define “residential property” for the detatched structure exemption and whether that includes residential properties in construcction. The language of the detached structure exemption seems to refer to existing structures. The preamble to the final rule does discuss defining “residential propoerty” but I don’t think it helps as it relates to construction of residential property. If you’d like to read the preamble, see the final rule beginning on p. 22. Because of the ambiguity, I would not apply the exemption until you have a residential structure. Also, you said the barn isn’t used for income, but ensure it is used primarily for personal, family, or household purposes and is NOT used primarily for agricultural, commercial, industrial, or other business purposes regardless of whether or not it produces income (e.g. stores farm equipment, livestock, harvest, etc. and the farm is the family business that would be a business purspose).

[Author]

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