Buying a home means taking on additional expenses to protect that home. This includes costs like homeowners insurance, which is a requirement of each and every home mortgage lender. Read on to better understand the minimum requirements for home insurance.
Do mortgage lenders require homeowners insurance?
Is homeowners insurance required? For borrowers with a mortgage, the answer is yes. Lenders establish homeowners insurance minimum requirements to protect their investment in your property. You'll find these spelled out in the mortgage loan terms. Lenders typically include a "scope of coverage" requirement, which specifies the minimum homeowners insurance requirements borrowers must fulfill.
Borrowers should shop around for homeowners insurance discounts. Getting quotes from the best homeowners insurance companies can help you get the required coverage at an affordable price.
Homeowners must provide proof of coverage before closing on a home loan. Those who already have a loan must continue to meet homeowners insurance minimum requirements. If you drop it, your lender will be notified. In that case, lenders generally buy far more expensive insurance on your behalf, commonly referred to as force-placed coverage. If your lender doesn't put its own insurance in place, it can instead declare the loan in default, which could result in foreclosure.
Many mortgage lenders require borrowers to make monthly payments toward home insurance as part of their mortgage payment. The lender collects the money and puts it into a special escrow account where it's held on behalf of the homeowner. When the insurance premium is due, the bill is sent to the lender and it's paid out of the escrow account. This way, insurers make certain borrowers fulfill homeowners insurance requirements.
How much home insurance is required by lenders?
Homeowners insurance requirements vary by lender. Borrowers can check their mortgage loan documents for "scope of coverage" requirements. These will explain their homeowners insurance requirements.
Homeowners insurance requirements generally specify the type of required coverage. They also establish the amount of required coverage. Borrowers generally must have enough coverage to fully rebuild the home if it's destroyed. Some lenders let borrowers maintain only enough coverage to repay the remaining loan balance.
Minimum home insurance policy requirements
Homeowners insurance requirements vary by lender. For any homeowner, one of the basics of buying homeowners insurance is to understand their lender's minimum home insurance requirements.
Knowing what home insurance generally covers is important for every property owner. Many homeowners buy more coverage than what's required to meet their lender's requirements.
Here are the types of protection borrowers either must have or may want to add.
Hazard coverage
Typically, the minimum home insurance requirements include hazard insurance. This generally pays for damage caused by:
- Wind
- Hail
- Smoke
- Fire
- Vandalism
- Civil commotion (such as riots)
When a hazard is covered by a homeowner's policy, the insurer pays to repair damages. If the home is completely destroyed, the insurer pays to rebuild. If a property owner has replacement coverage, the insurer pays to rebuild the home as it stands. If a property owner has market value coverage, the insurer pays what the home is worth.
Flood insurance
In some cases, homeowners insurance requirements extend beyond standard hazard insurance. For example, flood insurance may be required for homes in flood zones.
Liability coverage
Liability coverage isn't generally required, but it's an important type of coverage. That's because homeowners could be held liable for losses if someone is injured on their property.
Liability insurance pays for legal bills if a homeowner is sued. It can also cover any monetary losses, such as the victim's lost wages and medical bills.
Personal property
Property owners may also want coverage for their personal possessions. This is not generally required by mortgage lenders. But without it, they would have to pay out of pocket to replace their belongings if they were destroyed in the home.
Why do mortgage companies require homeowners insurance?
Mortgage lenders have homeowners insurance requirements because the home acts as collateral on a mortgage, meaning that the home guarantees the loan. If a homeowner doesn't pay, the lender can seize the property and sell it to recover the money for the unpaid loan balance.
However, if the property is destroyed, the homeowner likely wouldn't have the money to rebuild it without an insurance policy in place. Lenders set homeowners insurance requirements to make sure insurance companies pay for repair or replacement of the property. This protects the home and ensures it retains enough value to continue to serve as collateral.