Three Mortgage Lender Requirements For Homeowners Insurance

If you still owe money on your property (i.e., you have not paid it off in total), you must get homeowners insurance. Given that the lender theoretically still has money invested in mortgaged residences, they want to ensure that their investment is adequately protected in the event of a catastrophic event.

1. Maintaining a Minimum Level of Coverage

Assume you purchase a home for $250,000 with a down payment of $25,000. Lenders require that you have a minimum of $225,000 in housing coverage. However, we always advocate insuring your house for its entire market worth ($250,000) and sometimes much more.

Additionally, lenders insist that you retain coverage for their portion of the mortgage, not yours. That is because if a covered risk ultimately damages your home and you continue to owe money on it, they will not lose the money they loaned you. Lenders may still be able to recover their funds through an insurance claim.

While lenders technically require only house coverage (since they have no investment in your personal possessions or anything else that may occur on your property), we also advocate purchasing comprehensive coverage.

Although this is the sole insurance available, we want to emphasize the critical nature of keeping enough coverage for all facets of your life. Additionally, it's worth noting that lenders frequently do not force you to have replacement cost coverage, but it's a prudent move to make.

2. Required Additional Coverage

Not insuring the home would be far too hazardous for them, and they must ensure that their investment is protected in all circumstances. That is also why lenders compel homeowners who have not paid off their mortgage to purchase flood insurance.

The same is true for mortgagees who reside in earthquake-prone areas. These individuals must retain proper earthquake coverage while still making mortgage payments. Individuals who live in an area prone to wildfires may also be obliged to maintain appropriate wildfire insurance.

3. Requirement for a Loss Payee

While you continue to make mortgage payments, your lender will require you to add them as a loss payee (along with yourself and anybody else on the mortgage). This assures them they will obtain compensation in the event of a homeowners insurance claim.

Insurance on a Mortgage vs. Insurance on a Home

Many individuals mistake conflating mortgage insurance and home insurance, although the two are quite distinct.

In a nutshell, house insurance protects the structure of your home, any structures linked to it, your personal items, and any medical expenditures or attorney fees incurred as a result of an injury sustained on your property. Personal mortgage insurance (PMI) assists the lender if you default on your mortgage payments.

Personal mortgage insurance is only required on conventional loans with a down payment of less than 20% or when refinancing a home with less than 20% equity.

As a mortgaged homeowner, the lender retains equity in your house and needs to preserve their investment, which is why it's critical to understand what you need - and what you don't!