What are Lender Requirements for Homeowners Insurance?

Lender requirements for homeowner's insurance
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Why is homeowners insurance required by lenders?

Lenders require homeowners insurance so that the property they have invested in is fully covered against damage. The lender also wants to make sure that you are capable of paying down the mortgage in the event that the home is destroyed. If your home is destroyed in a fire and you don’t have insurance, your mortgage doesn’t disappear — you’re still required to pay off the loan. However, you most likely won’t continue to pay off 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. Thus, by lenders requiring homeowners insurance prior to letting you take out a mortgage, they are protecting their investment as well as yours.

How much insurance do mortgage lenders require?

Most lenders will require that your home be insured for its total replacement cost, as their primary concern is making sure the home can be rebuilt from the ground up in the event of a loss. The insurance company will provide you with an estimated cost of your home. Older homes may require a modified cost policy to cover the cost of updated materials rather than using older methods that are currently in the home.

Minimum coverage requirements for homeowners insurance.

  • Dwelling Coverage: Covers damage to the structure of your home, such as your roof, foundation, built-in appliances, cabinets, and any attached structures.
  • Mortgagee Clause: a provision added to a property insurance policy that protects the lender, or mortgagee, from suffering major losses on their investment.

Components of homeowners insurance.

These are the typical components of your homeowners policy:

  1. Other Structures: Covers damage to detached structures on your property, such as your garage, shed, above ground pool, or fence.
  2. Personal Property: Covers the cost of damaged or stolen personal belongings.
  3. Additional Living Expenses: Covers the costs of hotel stays and restaurant meals if your home is being repaired or rebuilt after a covered risk.
  4. Personal Liability: Covers legal and medical expenses if you are held liable for injury or property damage to others, for example, if your dog bites a neighbor.
  5. Medical Payments: Covers another person’s medical bills if they are injured on your property.

Learn more about the different types of homeowner’s insurance.

Additional coverages for homeowners.

Hurricane or Windstorm Coverage: Windstorm insurance protects policyholders from property damage caused by gales, winds, hail, and other hazards.

Flood Insurance: Flood Insurance goes beyond the coverage of a homeowners insurance policy by protecting you from more severe types of water damage. This includes heavy rain, melting snow, and severe coastal storms.

Learn more about flood insurance here

Earthquake Insurance: Earthquake Insurance provides coverage for your home in the event that an earthquake causes damage to it. Most homeowners policies do not cover damages caused by earthquakes. 

Additional Insured Endorsements: Additional Insured Endorsements are associated with general liability insurance policies and provide coverage to other individuals that were not initially named in the policy. With an additional insured endorsement, the additional insured will then be protected under the insurer’s policy and can file a claim in the event that they are sued.

Disclaimer: This blog post is meant for general informational purposes only and may not reflect your specific policy.

About the Author: Alekha is an expert in the insurance space and has been with the Malhotra & Assoc. Insurance team since its inception. Alekha works to provide expertly written and researched content for the Malhotra & Assoc. Insurance agency.

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