More often than not, people use a mortgage lender when purchasing a new home to handle offers and underwriting of a home loan. In order to protect not only your investment, but the mortgage lender’s as well, you’ll be required to have a homeowners insurance policy. While states may not legally require homeowners to have home insurance, mortgage lenders typically mandate homeowners insurance to ensure that the property securing the loan is protected.
By meeting lender requirements and comprehensively insuring your property, you can protect your investment and mitigate financial risks associated with property damage. In this guide, we’ll review mortgage lender insurance requirements and discuss how to calculate your coverage needs so you can find the right home insurance policy.
Is homeowners insurance required by a mortgage lender?
Mortgage lenders often require home insurance to make sure the home they have invested in is fully covered in the event of catastrophic damage. Lenders require homeowners insurance to safeguard their investment and to ensure that borrowers are financially capable of paying down the mortgage in the event of property damage or destruction.
In addition to standard homeowners insurance, lenders may require supplemental coverage like flood insurance, especially for properties located in high-risk flood zones.
Mortgage Lender Requirements for Home Insurance
Your mortgage lender will require that the dwelling portion of your policy protects against the following incidents:
Fire and lightning
Damage from wind and hail
Theft and vandalism
Falling objects
Damage from weight of snow, ice, or sleet
Frozen pipes
Vehicles
Riots or civil unrest
Smoke damage
Explosions
How much home insurance does a mortgage lender require?
Each mortgage lender will have different requirements for home insurance, but they will typically require your home insurance to cover the equivalent of or less than the following:
The full replacement cost of your home, which is determined by the insurance company
The unpaid balance on the mortgage
Will mortgage lenders require me to purchase any additional insurance coverage?
If your policy excludes any of the incidents listed above, your lender may require you to fill the gaps in your coverage with additional insurance policies. Mortgage lenders may require you to purchase additional insurance coverage beyond standard homeowners insurance, especially if your property is located in a high-risk area.
For example, if your home is located in an area susceptible to flooding, earthquakes, hurricanes, etc., your mortgage lender may also require you to get separate insurance to cover these potential risks. It's important to note that these additional insurance requirements are typically enforced by mortgage lenders to protect their financial interests in the property, especially in areas prone to specific perils.
When should I get home insurance?
Your mortgage lender will let you know their homeowners insurance policy requirements prior to closing so you can make sure your policy is in place. Once you’re aware of the requirements, you’ll want to shop around to get the right coverage at the best price available to you.
How to Calculate Your Home Insurance Coverage Needs
When deciding on a homeowners insurance policy, you should consider all of your needs as they relate to each of the four basic types of coverage. It’s important to know that your insurance isn’t necessarily based on the current value of your home or your mortgage, but that it’s based on what it would cost to recreate your home in the event of a disaster. The four basic types of home insurance coverage are:
Dwelling: The coverage limits on your home insurance policy are based on your dwelling coverage, while the limits for other coverages on your policy are typically calculated as percentages of your dwelling limit.
Personal Property: For personal property coverage, you’ll want to take inventory on all of your belongings and estimate the costs of everything. It’s easy to underestimate how much we own, so you’ll want to consider taking inventory of your personal belongings. Consider furniture, electronics, clothing, jewelry, and other valuable items. If possible, document your belongings with photographs or video.
Liability: Liability loss claims can often be the most expensive home insurance claim. When deciding how much personal liability coverage you need, you’ll need enough to cover your total combined assets and the potential costs of legal defense in case of a liability claim. You’ll also want to consider the liability risks attached to your home, such as something like a pool, trampoline, or treehouse.
Loss of Use and Additional Living Expenses: Loss of use and additional living expenses coverage can help pay for lodging, meals, animal boarding, and any other expenses that arise in the event you’re unable to stay in your home. This can come after a natural disaster or other unpredictable event over which you have no control. To determine the amount of coverage you’ll need, calculate the potential cost of temporary accommodation, dining out, and other necessary expenses.
Our coverage quiz can help get you started on determining how much home insurance coverage you need.
Secure the Right Amount of Homeowners Insurance Coverage with SelectQuote
Securing home insurance can seem complicated, but it doesn’t have to be. At SelectQuote, we simplify the process by getting to know your needs, understanding your mortgage lender’s requirements and finding you the best homeowners insurance available to you from the trusted insurance companies we work with.
