Insurance premiums are quietly killing deals in the state - making homes look affordable on paper, but impossible to close
In Colorado, homeowners’ insurance premiums have become the hidden dealbreaker – rising so fast they’re knocking buyers out of mortgage eligibility and turning once-viable properties into financial dead ends.
Home insurance premiums in Colorado have surged more than 50% since 2018, fueled by mounting wildfire, hailstorm, and flood risks, according to the Rocky Mountain Insurance Information Association. That spike isn’t just straining household budgets - it’s becoming a critical factor in whether buyers qualify for a mortgage.
With more than three decades in the mortgage business, Justin Smith (pictured), of Cornerstone Home Lending, has watched the Mountain West’s affordability crisis unfold in real time. Now, he said, rising premiums are pushing more buyers to the edge.
"Those rates have doubled in the last five years," Smith said, referring to homeowners' insurance costs on single-family homes.
"Ultimately, it's a math problem. If your insurance bill went from $1,200 a year to $2,400, clearly that has an affordability component to it."
In Colorado, that math problem is getting harder to solve. Skyrocketing premiums - driven not only by wildfire risks and hailstorms but also by inflationary pressures - are distorting both perceptions of affordability and actual mortgage eligibility.
"It’s having a much more dramatic impact than any of us would like," Smith said.
The Impact on loan qualification and lending strategy
But insurance isn’t the only pressure point. Over the past decade, Smith has seen the industry endure several economic shocks - none more pronounced than the fallout from the 2008 financial crisis and the COVID-era lending surge.
"During COVID, our entire industry basically did three and a half years' worth of volume in about 18 months," he said. "I’m still not even sure what happened there exactly. That was the craziest 18 months of my life."
The aftershocks are still being felt. "We’ve seen lenders exit the space. We’ve seen a lot of M&A activity. We're going to see more. There's still some contraction that needs to take place," he said.
Rising premiums may not have disqualified borrowers en masse, but they're cutting it close. When buyers are pushed into high debt-to-income (DTI) ratios, insurance can become the tipping point. In some cases - especially with condos and townhomes - the structure of insurance policies themselves is creating new fault lines.
"With attached housing, this equation gets a little bit more muddied," Smith said. "The insurance industry has now exceeded [deductible] limits that Fannie Mae and Freddie Mac accept. So, they're rendering entire condominium projects what we call 'unwarrantable.'"
When Fannie and Freddie back away, buyers are forced into the non-qualified mortgage space, facing significantly higher rates and fewer financing options. "There are private label investors out there, but those private label investors all charge more," he said.
Still, Smith doesn’t believe the answer lies in loosening underwriting rules. "They have not meaningfully adjusted their debt ratio limitations. Should they? Well, probably not," he said.
"Clearly the insurance cost plays a role in affordability, but what [the agencies] are looking at is overall risk analysis. They're trying to assign some level of predictability to the borrower's ability to have that mortgage," he said.
Creative workarounds and policy fixes
With premiums driving up monthly housing costs - especially for FHA and first-time buyers - lenders are leaning into short-term tactics to preserve deal flow. Temporary rate buy-downs and seller concessions have become widespread.
"There's the perception of affordability," Smith said. "We can do things where it affords the borrower a lower payment, but only temporarily. That works specifically if it's a situation where there's going to be additional income or debt pay-down soon."
Permanent buy-downs are gaining traction, particularly in new construction. Builders are offering below-market rates through forward commitments, and Smith sees this as mathematically more effective than simply dropping home prices.
"That's also a better strategy from a mathematical standpoint for the buyer than just lowering the price of your house," he said.
But even creativity has limits. With property taxes, insurance, and interest rates forming a pressure trifecta, Smith sees policy reform as a necessary part of the fix.
Locally, he suggested helping builders manage the high cost of delivering buildable lots. Federally, he believes tweaks to capital gains exemptions could help unlock more housing supply - particularly from owners of second homes and rentals.
"There’s potentially some things they could do on the capital gains side that would spur some of those properties being put back into the marketplace, which would help our demand side problems dramatically," he said.
To close the growing gap between what insurers charge and what Fannie/Freddie allow, he floated the idea of a federally backed deductible insurance program - a targeted stopgap, not unlike the National Flood Insurance Program.
"Perhaps we could come up with some sort of a uniform program. We're not going to insure the whole project, but we could cover the difference between what is acceptable to Fannie and what the insurance industry wants."
Even so, Smith remained measured. "I'm a guy that believes the market will find a way," he said. "But there are things that have been put in place that if we could undo, I think there would be a much more immediate benefit to some of these folks that are struggling to get into the market."
The math may be brutal, but Smith’s message is clear: without targeted reforms and market adaptability, rising insurance premiums could continue to erode the already fragile foundation of housing affordability in Colorado.
