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Last Updated on July 25, 2024 by Insurdinary Editorial Team | Fact Checked by Rhonda Gary -->
When you purchase a house, you invest a significant dollar amount in yourself, your family, and your future. Many people want homes to call their own. However, few understand the additional expenses required to obtain and maintain their new homes.
Before you purchase property, you might need home insurance to satisfy your mortgage lender’s requirements. Can you get around this added expense? Should you try? Insurdinary discusses the answers below to help you make smart investments.
Homeowners insurance helps you anticipate and navigate the unexpected in a nutshell. You need professional repairs if your home incurs damage for any reason. However, those repairs can cost thousands to hundreds of thousands of dollars.
When you imagine home damage, you might picture a small sink leak or similar inconvenience that slightly raises your water bill and leaves an unsightly stain. However, property damage can have devastating, life-altering effects. Violent storms, heavy rains, and sudden fires can demolish your home within moments, leaving it uninhabitable until professionally restored or rebuilt.
Many people cannot afford these services out of pocket. These situations can force homeowners to resell their homes at lower market values, putting them out of thousands of dollars and their living quarters. Property insurance can prevent such devastating situations from arising.
When you purchase an insurance policy to cover your house, you can use your coverage to pay for expensive restoration or repair services following a disaster or catastrophic discovery. You routinely pay a premium to maintain your coverage. You can include additional types of coverage to extend your protection as needed.
Purchasing property is an expensive venture. You may not have the funds readily available to buy the home of your dreams. However, a mortgage lender can bridge the gap between a buyer and a homeowner.
Lenders finance residential real estate transactions based on factors like:
Essentially, a lender will dive deep into your financial history and capabilities to determine whether they can rely on you to pay back the loan. If your financial history looks clean and you cut a capable figure, they might lend you the money needed to purchase the property. However, these loans often come with stipulations following the purchasing transaction.
First, mortgage lenders generally profit from lending money to homebuyers by earning an interest rate on top of the flat loan payments. Second, they often require the buyers to adhere to mandatory protective measures, like purchasing a household insurance policy. Since mortgage lenders put up money to pay for their borrowers’ properties, they have a vested interest in ensuring their borrowers pay on time.
Sudden complications, like storm, water, or fire damage, endanger your ability to afford timely mortgage payments. Some form of dwelling protection protects the mortgage lender and you as the property owner from unexpected financial blows.
If you purchase a property with your own cash, you can enter homeownership without insurance coverage requirements, as no state or municipal laws require a policy to own property. However, obtaining homeownership with the help of a mortgage lender will almost certainly involve a minimum scope of coverage. How does your lender determine coverage scope?
Consider the factors that could potentially damage properties in your area. For example, you might live on the west coast. Therefore, your minimum coverage might require earthquake insurance to cover any expenses incurred following seismic activity.
Earthquakes are just one instance of what your mortgage lender might require. Qualifying for a loan can become a little more complex and require multiple types of insurance coverage. Plus, you might need insurance that offers more than basic property coverage.
The following examples explore more comprehensive policies alongside their limited counterparts.
While homeowner’s insurance often covers property and the structures within its vicinity, it doesn’t cover your personal belongings, like furniture, clothing, electronics, or appliances. If, for instance, a pipe bursts in your home, the water could flood a room and contaminate all items within the vicinity. You will pay out of pocket to replace these belongings.
Most mortgage lenders do not require that their borrowers have personal property insurance. However, purchasing this type of coverage will ensure you receive the dollar amount that each damaged item was worth. You can then replace it with a new one.
Minimal home insurance coverage typically includes hazard protection. It handles property damage caused by garden-variety events, such as:
You can rely on these policies for a basic protection level when unforeseen circumstances occur and wreak havoc on your property.
While hazard protection includes coverage for intense storms, it doesn’t always cover severe floods. If you live in an area prone to flash floods or similar natural disasters, you might need to purchase an additional flood protection policy to keep up with your lender’s requirements. Flood damage can significantly devalue a property, making it unsafe for inhabitants.
Therefore, you might want this type of coverage if you live near a body of water, even when your area doesn’t have regular flood events.
Your lender may or may not require liability coverage. Many mortgage lenders do not mandate that their borrowers purchase a liability policy. However, this type of insurance can protect you from personal liability if someone injures themselves on your property.
If a visitor trips, falls, and becomes seriously hurt on your property, they could sue you to pay for their medical expenses, lost wages, and other damages. These cases can put you under thousands of dollars, even if you had no involvement with the injury beyond being the property owner. Liability insurance covers those costs, shielding you from the financial burden.
Some mortgage lenders have a network of providers they use to insure their borrowers’ property. If you fall into that category, you can switch your insurance provider or shop for different policies once you pay your mortgage. You can also go without coverage completely, since now laws mandate that property owners purchase residence coverage.
However, insurance coverage gives you continuous home assurance. In other words, you never have to worry about natural disasters and other events that fall within your policy’s coverage. If you shirk your coverage completely after paying your mortgage, you could land in a precarious financial situation later on.
You might not even need to experience a major local disaster to cross into this territory. Some common examples include:
Each listed issue can occur regardless of external natural events. Most basic policies will foot at least 80% of the associated costs.
It is highly unlikely that you can obtain a mortgage without some insurance requirement. However, if you under-insure your property or drop your coverage altogether while paying a mortgage, your lender could:
Neither outcome financially favors you as a property owner.
Some people confuse mortgage insurance with homeowners insurance. However, these two types of coverage differ vastly. Mortgage insurance protects your lender’s loan investment, while homeowners insurance protects your home and property from damage.
Many lenders require that borrowers pay for mortgage insurance. However, you might circumvent this additional cost by saving up for a sizable down payment.
Mortgage lenders require their borrowers to obtain a minimum level of home insurance to honor their loan contracts. However, you should still maintain a reasonable coverage amount following your mortgage payoff to protect your property from unforeseen disasters. Whether you are a first-time homebuyer or a homeownership veteran, use Insurdinary to explore your options.
Gather and compare quotes for personal property, hazard protection, and other types of property insurance with guidance from our agents. Get more information today!