Homeowners Insurance Requirements for a Mortgage
Homeowners insurance comes in many sizes and shapes— eight different types of policies exist, including specific policy types for condo owners and mobile homeowners.
No matter the kind of policy, mortgage lenders can require specific insurance coverage when offering a loan to buy a house.
A standard homeowners insurance policy contains several parts. One component is hazard insurance. Put simply: it protects your home against threats like theft, fire, smoke, lightning, and wind damage.
Lenders require hazard insurance to protect the dwelling and structure—if a bad storm damages your home, it can cover the cost to rebuild it.
But don’t get confused if your mortgage company asks you to get “ hazard insurance.” The term is used interchangeably with homeowners insurance.
Your policy should protect against the most common perils. A peril is an event that can damage your home or belongings.
According to the Insurance Information Institute (III), the most common covered losses are:
Fire or lightning
Windstorm or hail
Vandalism and malicious mischief
Damage from an aircraft, car, or vehicle
Weight of ice, snow, or sleet
Limited water damage
Your home insurance policy may also list scenarios that it won’t cover. Policy exclusions are important to know before disaster strikes. Check with your mortgage lender to make sure you’re protected against all required perils.
Types of Coverage
Homeowners insurance includes protection for more than just your home. A typical homeowners insurance policy includes several types of coverage:
Dwelling coverage: Coverage for the physical structure of your home and attached structures like a garage or carport
Other structures: Protects detached structures like a shed, fence, or detached garage
Personal property: Coverage for your furniture, clothing, power tools, and other personal belongings
Loss of use: Pays reimbursement costs for additional living expenses if you can’t live in your home after a covered loss
Liability coverage: Protects you financially from medical expense claims or lawsuits if someone is hurt on your property
Home insurance typically includes these five categories. However, limitations exist and can vary by insurer.
Minimum Policy Limit
Your mortgage company will set a minimum coverage limit. The amount must be high enough to fully replace your home if a fire or other disaster destroys it.
Depending on your lender, your minimum policy limit must be enough to cover:
If your home is destroyed, you won’t have an incentive to continue paying your mortgage payments. The minimum policy limit makes sure the mortgage is paid if disaster strikes.