Cost & Coverage
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Learn more about what type of homeowners insurance lenders require before you close on your mortgage.
After you’ve shopped around and settled on your home, your lender will require that you fulfill a set of requirements before you can close on your mortgage. One of these requirements is that you buy a homeowners insurance policy to protect your home and personal belongings.
Your lender will require that you buy enough home insurance to cover the entire mortgage in the event that something bad happens. If your home was wrecked in a storm and it wasn’t covered, your mortgage wouldn’t have much value.
Your lender may only specify that you buy “hazard insurance” (covers the structure of your home and your personal property against hazards), but what they really mean is that you buy a full homeowners insurance policy. Standard homeowners insurance includes hazard coverage (dwelling, other structures, and personal property coverage), and also covers your personal liability, medical payments to others injured in your home, and additional living expenses if you were forced to relocate.
Read on to learn more:
The mortgage is essentially an agreement between you and your lender that requires you make monthly repayments or risk losing the home. When you take out a mortgage, you own the title of the home once you make your down payment, which is the initial mortgage payment you make to your lender so they can begin paying off the home’s seller. Your down payment constitutes a percentage (anywhere from 3% to 20%) of the home price.
(Use the Policygenius Mortgage Calculator to learn how your down payment affects the cost of your mortgage throughout the life of the loan.)
To protect both you and their investment, lenders require homeowners insurance so that they don’t lose out on the remaining mortgage amount if your home is destroyed in a catastrophic event. They’re also protecting you from yourself, as you’d still be stuck repaying the mortgage on a tornado-ravaged house. If you don’t repay your mortgage or you default, the bank can at least repossess the house and resell it. If you don’t have insurance, your home is destroyed, and you’re unable to repay your mortgage, the lender would lose out.
Minimum amounts can vary depending on your lender, where you live, and how old your home is. Your lender’s primary concern is making sure your home is completely covered, so most require you buy, at the very least, enough hazard insurance to cover the amount of their loan to the home’s seller. In that case, a $300,000 home with a $30,000 down payment would require somewhere around $270,000 in coverage.
There are other coverages to consider as well. If you live in an area prone to hurricanes or tornadoes, your lender may specify that you add a minimum amount of wind and hail coverage. Same deal if you live in a floodplain or seismic zone – you’ll probably have to buy a minimum amount of flood or earthquake insurance.
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Coverage, in this case, refers to the “dwelling” and “other structures” provisions in a homeowners insurance policy, since the lender’s interest is ensuring the home itself is protected. There are also additional coverages your lender may require to supplement your basic policy in order to protect your home against every peril.
The dwelling provision covers the structure of your home and reimburses you for rebuild costs if it’s damaged or destroyed. It makes up a large chunk of your policy, and the monthly premiums you pay are primarily because of your dwelling policy limit (the maximum amount you’ll be reimbursed for a claim) and whether you’re reimbursed for the home’s replacement cost or actual value at the time it was damaged.
Your mortgage lender will expect your dwelling coverage to protect the home against, at the very least, the following hazards:
Your lender can also stipulate certain settlement specifications in your policy. The settlement is the amount your insurer pays you after you file a claim, and your lender may require your dwelling claims be repaid on a replacement cost value (RCV) basis. That means your reimbursement amount reflects the current rebuild costs.
The alternative – actual cash value (ACV) policies – only reimburse you for what your home was worth at the time it was damaged or destroyed.
Policies with RCV provisions are generally more expensive, but if you live in a region susceptible to disasters or high claim frequency where rebuild costs can fluctuate, RCV policies are a safer bet.
Homeowners insurance typically covers wind damage, but if the damage was caused by a hurricane, it may not be covered. In fact, 19 Atlantic coast states and the District of Columbia currently offer separate hurricane coverage (with separate “percentage deductibles”) since hurricane ravaged homes in coastal areas aren’t covered by a standard policy. If you live in a hurricane prone area, your lender will probably instruct you to buy hurricane insurance.
In addition to requiring homeowners insurance, most lenders will require that you also buy flood insurance if your home is located in an area prone to flooding. FEMA designates the flood regions based on the of the frequency and likelihood of floods: A is high likelihood, B is less likely but still high likelihood, and C is low likelihood but still at-risk. If you live in any of the three designated zones, there’s a good chance you’ll be required to buy flood insurance by your lender.
If you live near a fault-line or area prone to seismic activity, your lender may also require that you add separate earthquake coverage. 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, the California Earthquake Authority.
While it isn’t likely, your lender may also require that you add additional coverages, or “riders”, so your policy. One of the more common riders, 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.
The other requirement your lender will have is that they’re 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 a damage or loss, the settlement check from your insurer is made out to both you and mortgage company. This is done to ensure 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.
You’ll probably need far more homeowners insurance than what your bank or lender says you need, which is where we come in. At Policygenius, our licensed representatives will make sure you’re fulfilling your lender requirements while fulfilling your personal requirements as well.
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