Jessica Fox Last Updated On: June 27, 2023

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Understanding the Link Between Homeowners Insurance and Mortgage Lenders

Mortgage lenders typically require policyholders to have homeowners insurance. Having homeowners insurance protects your most valuable asset (your property) from unexpected damages like burglary or fire. 

Think about it this way: most policyholders owe a lot on their mortgages. Suppose a weather event like a tornado causes significant or catastrophic damage to your property. In that case, you’re still on the hook for your mortgage, so homeowners insurance is there to help pay for repairing/rebuilding costs to safeguard your investment.

The real question is, how much homeowners insurance is required by mortgage lenders?

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How Much Homeowners Insurance Do You Need?

The main concern for lenders is that your homeowner’s insurance covers 100% of your home replacement costs so that you can afford to replace the house in the event of catastrophic damage. Usually, the insurer’s coverage estimate will satisfy the lender’s minimum requirements.

Lender requirements for home insurance depend on three primary factors: where your home is located (how accessible it is for home calls), the loan amount, and the down payment amount.

Why Do Mortgage Lenders Require Homeowners Insurance?

Lenders require homeowners insurance in order to protect the policyholders’ property as well as their financial investment. For example, if your home were to sustain catastrophic damage and you didn’t have homeowners insurance, you and your lender would be financially responsible for repairing/rebuilding.

Additionally, if a significant weather event destroys your home and the policyholder doesn’t have home insurance, there is no physical home so foreclosure wouldn’t be possible and lenders would lose their financial investment. Lenders want proof that you qualify and have homeowners insurance on your house. This shows them that you’re financially capable of paying your mortgage should your home be destroyed.

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Homeowners Insurance Requirements

If you’re in the market to buy homeowners insurance for your home, these are the top three requirements:

  • Maintain minimums: The right amount of home insurance is enough to cover the entire replacement value of your property. So if your home is worth $350,000, you will need the equivalent in home insurance.
  • Have the right coverage: Ensure that you have the right insurance for your home. For instance, you will need windstorm insurance if you live in a tornado-prone area. Here are the different coverage options:
    • Dwelling: Home insurance is dwelling coverage and the only mandatory coverage option. Dwelling coverage covers the replacement value for your home and any structures on site. These are the most common perils that you should have coverage for:
      • Lightning
      • Fire
      • Explosions
      • Wind and hail damage
      • Vehicle(s)
      • Falling objects
      • Vandalism and theft
      • Frozen pipes
      • Smoke damage
      • Riots or civil unrest
      • Damage from the weight of ice, sleet, or snow
    • Windstorm/Hurricane: If your home is in an area susceptible to windstorms, hurricanes, or tornadoes, insurers will require you to purchase a windstorm rider. However, some states require hurricane deductibles at 1-10% of your home’s value.
    • Flood: If you live in an area vulnerable to flooding or hurricanes, you will need flood coverage. The National Flood Insurance Program (NFIP) typically provides flood coverage to homeowners, but some insurers offer it as well.
    • Earthquake: If you live in an area known for earthquakes, earthquake coverage is mandatory. Some states offer earthquake coverage; otherwise, earthquake coverage is available as a policy add-on through private insurers.
    • Additional: Some lenders require homeowners to have additional coverage features, like water backup coverage (protection against sump pumps breaking or sewage pipes overflowing). Policyholders can also elect to purchase these riders.
  • Naming your lender as a payee: Listing your lender as a payee on your policy means that, should you need to file a claim for loss/damages, the payout check is written out to the policyholder and lender. This guarantees the payout will go towards home repairs/rebuilding.

So, why do mortgage lenders require homeowners insurance? It helps protect you, your assets, and the financial investment of the lenders, but it’s overall a smart move.

Optional Homeowners Insurance Requirements

Every lender has different stipulations. These are the optional home insurance requirements that you may need to add to your policy to comply with lender requirements:
  • Mortgagee clause: Your lender may require that your insurer cannot cancel your coverage without first providing a 30-day notice to the policyholder and lender via a mortgagee clause.
  • “Force Place”: This costly requirement means if the home insurance is canceled because of non-payment, you’re now on the hook for the premiums.
  • Deductible coverage: If you have windstorm coverage with a percentage deductible to keep things affordable, it prevents the deductible from surpassing a certain percentage.
  • Percentage deductibles: Before your insurance policy kicks in, the policyholder must pay a percentage deductible first.
  • Proof of coverage: The policyholder must provide proof of insurance at the final sale of your home.
Understanding what you may be required to have in place for your home will help you budget accordingly.

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Do Mortgage Lenders Require Homeowners Insurance?

Yes, all lenders require that homeowners have home insurance. Home insurance is valuable to the lender, but to the homeowner as well. Should a catastrophic event like a hurricane occur and destroy your home, home insurance protects the policyholder and lender from being financially responsible for 100% of the home’s replacement cost.

Jessica Fox Jessica Fox has been a freelance writer for five years, with a specialty in health, wellness, and insurance. During this time, she’s written for some of the biggest B2B and B2C brands from around the world. Jessica is also the mother of two young daughters and loves coffee, writing, and working out.

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