Why is Hazard Insurance Required by the Mortgage Company?
April 21, 2017
Buying a home can be an exciting time and it can also be a stressful time. After you found the home of your dreams you will now need to get approved for a mortgage and find hazard insurance. Mortgage companies require many things to protect their investment because after all it is their money on the line. If you are like most people buying a house today you will probably only put down approximately 3 to 5 percent of the total purchase price. This leaves the other 95 to 97 percent owned by the insurance company. The lender will require you to insure the property with what is commonly known as hazard insurance. I will explain why they require this insurance and answer common questions about hazard insurance.
Hazard insurance is a term used by most mortgage lenders and is no different than homeowners insurance. When your mortgage lender tells you that they need proof of hazard insurance they are really looking for a home insurance policy that will protect against major hazards like fire or wind. If something like a tornado hits your home the mortgage company wants to make sure their investment is covered. Until you pay off your mortgage in full the lender will require you to carry hazard insurance.
Here are some standard insurance requirements your lender will ask for:
The physical structure is commonly referred to as the dwelling. This coverage encompasses the entire house but can exclude separate items like a shed. Dwelling coverage is calculated by various factors including livable square feet, construction materials used and year build. These variables help the insurance company determine how much it will cost if the entire structure needs to be rebuild.
Most mortgage companies want to see that your dwelling coverage meets or exceeds the loan amount. This is just another way for the lender to make sure the full investment is covered. Don’t confuse the market value of your home with the dwelling coverage as they can be vastly different since the dwelling coverage does not account for the value of the land. When shopping for hazard insurance be sure to ask the agent what they recommend for dwelling coverage because you don’t want to be under insured when a claim is needed.
Similar to your auto insurance there is a deductible on your home insurance policy. If you file a claim this is your out of pocket expense. Some mortgage companies will only accept a deductible that is less than $2500. They will require a lower deductible so you can afford to file the claim and repair the home. If your deductible was $5000 you may not replace the roof after a bad hail storm which could cause further damage to the home. Most insurance companies will offer deductibles ranging from $500 to $1500 but other amounts are available. Be sure you understand what your deductible is and if you have a fixed dollar or percentage deductible.
Fixed dollar deductibles will never change in amount but a percentage deductible will change with the increase in dwelling coverage. For example if you have $200,000 in dwelling coverage with a 1 percent deductible that would make your out of pocket expense $2000 to file a claim. Each year the dwelling coverage will likely increase with inflation making your deductible increase as well.
These are some common reasons why mortgage companies require hazard insurance and what they are looking for in your policy. To find the lowest price policy available try getting multiple quotes online.