Mortgage lenders will require you to purchase a homeowners insurance policy to help repair or rebuild the home in case of a potential fire or storm damage. After getting approved for a mortgage, you will be required to provide multiple documents to officially close on the loan. The required documents include proof of homeowners insurance coverage.
Why Mortgage Lenders Require You to Buy Home Insurance?
Homeowners insurance coverage protects the mortgage lender’s investment from damages caused by inclement weather, fire, or vandalism. The mortgage lender may require you to get separate flood insurance coverage if your home is located in a high-risk flood zone. In most cases, the lender will give a scope of coverage requirement that will show what the homeowners policy must cover.
The policy must cover fire, wind, hail, and vandalism at the least. Also, the homeowners policy will be required to have enough coverage to fully replace the home if it gets destroyed as a result of fire or other disasters. Mortgage lenders require homeowners insurance as a means to ensure their property is fully protected against damage. They also require this to make sure the borrower can pay down the mortgage if the home gets destroyed.
How Much Home Insurance Coverage Is Required?
Your homeowners policy must cover 100% of your home’s replacement costs, i.e., it must cover the total cost of a potential rebuild in the event of a disaster. If you have full coverage, the insurance company’s estimate will exceed the lender’s minimum requirements in most cases. To get a more accurate estimate, you can get a rebuild appraisal of the home by consulting local contractors, construction companies, or roofers.
In some cases, the lender may only require a coverage amount that equals the unpaid coverage balance. In addition to minimum coverage requirements and certain hazards, mortgage lenders may also require that the dwelling coverage policy covers certain hazards such as fire and lightning, wind and hail damage, theft and vandalism, falling objects, snow, frozen pipes, smoke damage, explosions, etc. If your policy does not cover some of these events, the mortgage lender may require that you get a separate policy to cover the coverage gap. There are certain terms that may be added to the policy.
1.The mortgage lender will require that they are named as a loss payee alongside whoever else is named on the homeowners policy. This means if you file a claim, the settlement check will be sent to you as well as the mortgage lender.
2.The lender may require that the insurer includes a clause in the policy stating that the policy cannot be canceled without a 30-day notice to the lender.
3.The insurer may require a deductible amount to ensure you do not cover too much out-of-pocket in the case of a loss.
In some cases, the lender may require other coverage to complement the homeowners policy. The most common type is flood insurance, but the insurer may require other types, such as windstorm insurance.