Cost & Coverage
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Before taking out a mortgage, your lender will require that you get enough homeowners insurance to pay for a rebuild of the home in the event of fire or storm damage.
Most lenders require that you insure your home up to its replacement cost
You’ll need to ensure the policy covers hazards like fire, wind, hail, and vandalism
Once you have homeowners insurance, you’ll need to provide proof of insurance to your lender prior to closing
If you live in a high-risk flood zone, your mortgage company will likely require flood insurance
Once you get approved for a mortgage on a home, your lender will ask you to provide them with multiple documents so that you can officially close on the loan. One of these required documents is your proof of homeowners insurance which ensures that the home — and, in turn, the lender’s financial investment — is protected against damage and catastrophic losses from perils like fire and bad weather. If you live in a special flood hazard area, your lender may also require flood insurance for the home.
Your lender will likely have “scope of coverage” requirements that detail what must be covered by the policy. In most cases, your policy will need to cover, at minimum, wind, hail, fire, and vandalism. Your policy will also need to contain a high enough coverage limit to fully replace your home in the event of a total loss. Mortgages secured through Fannie Mae, for example, typically require your homeowners insurance coverage amounts to be equal to the lesser of the following:
When your lender initially notifies you of home insurance requirements, they may instruct you to get “hazard insurance”, but don’t let that confuse you — homeowners insurance and hazard insurance are the same thing and mortgage companies often use the two terms interchangeably.
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Lenders require homeowners insurance so that the property they have an investment in is fully covered against catastrophic damage. The lender also wants to make sure that, as the borrower, you’re financially capable of paying down the mortgage in the event that the home is completely obliterated.
If your home is wiped out in a hurricane and you don’t have insurance, your mortgage obligation doesn’t simply disappear — you’re still technically required to pay off the loan. But chances are you won’t continue to pay down the mortgage of a home that was destroyed, and foreclosure won’t be of much help for the lender as there’s no actual home to repossess and sell. That’s why lenders require homeowners insurance prior to letting you take out a mortgage — the lender isn’t only protecting their investment, but they’re also protecting you from yourself.
Most lenders will require that your home be insured for 100% of its replacement cost, as their primary concern is making sure the home can be rebuilt from the ground up in the event of a disaster. In most cases, the insurance company’s coverage estimate will more than meet your lender’s minimum amount requirements. You can also receive a more accurate estimate by getting a proper rebuild appraisal of the home or contacting local contractors, roofers, or construction companies.
It’s also possible that your lender will only require a coverage amount equal to the unpaid mortgage balance — but keep in mind that electing for this amount could leave your home vastly underinsured.
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In addition to minimum levels of coverage and ensuring your home is covered against particular hazards, your insurance company may also have the following requirements:
Your lender will require that the dwelling coverage portion of your policy protect the home against, at the very least, the following hazards:
If your policy excludes any of the listed perils, your lender may instruct you to find a separate policy to fill that coverage gap. If your insurance company requires a separate deductible for windstorm and hurricane damage, you’ll likely have to add those deductibles to your policy.
Your lender will require that they be named as a loss payee along with yourself and whoever else is a named insured on the policy. That means that when you file a claim because of damage or loss, the settlement check from your insurer is made out to both you and the mortgage company. This ensures that the money you’re receiving from a claim is going toward a covered loss and protecting the lender’s investment. Your lender is required by your insurer to sign off on any home-related expense that your settlement check goes toward.
Your lender may also require that your insurance company includes a clause in the policy stipulating that your coverage can’t be canceled without a minimum of 30-days (written) notice to the lender and that they assume liability if there is no disclaimer.
If your policy has separate percentage deductibles for wind and hail or hurricane damage, your lender may require that the deductible not exceed a certain amount so that you’re not left paying too much out of pocket in the event of a loss.
Your lender will also require proof of homeowners insurance, as well as any other type of insurance you may need before you’re able to close on the mortgage. Don’t delay looking for coverage and potentially jeopardize your ability to close in a timely manner. Most lenders will require proof of homeowners insurance — also known as an insurance binder — anywhere in the days, and in some cases, weeks ahead of closing.
It’s possible that your lender will require coverage to complement your homeowners insurance policy. The most common type of required supplemental protection is flood insurance, but your lender may have other coverage requirements as well.
Homeowners insurance typically covers wind and hurricane damage, but certain insurers may exclude these perils from coverage if your home is at a particularly high risk of tropical storm-related loss. If that’s the case, your lender will likely require you to fill that coverage gap with an additional insurance policy.
Wind-only policies can be purchased through insurers who specialize in “surplus” or “excess” lines of insurance, which is coverage that is meant to cover particular risks. In certain states, supplemental windstorm coverage can also be obtained via your state’s FAIR Plan (Fair Access to Insurance Requirements).
In addition to requiring homeowners insurance, most lenders will require flood insurance if your home is located in a high-risk flood zone according to Federal Emergency Management Association flood maps.
If you live near a fault line or area prone to seismic activity, your lender may also require that you acquire earthquake insurance. Earthquake coverage is offered as either a standalone policy (with a deductible that ranges from 5% to 15% of your policy limit) or as an added endorsement. Earthquake policies are offered by either private insurers or, in California’s case, through the California Earthquake Authority.
While it isn’t likely, your lender may also require that you add additional coverages, or endorsements to your policy. One of the more common endorsements, water backup coverage, protects your home against water damage from overflowing sewers or drains, broken sump pumps, and more. Depending on the location of your home, your lender may require that you add this coverage.
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