Lender's Homeowners Insurance Requirements

by William Pirraglia

    Homeowners with a mortgage must carry homeowners insurance. Your lender will specify minimum policy limits and hazards to be covered. Lenders require that you have a homeowners insurance policy that at least equals the balance of your outstanding mortgage loan. Purchasing replacement value insurance is better, although a bit more expensive. Be sure your homeowners policy covers all hazards that your lender requires to avoid mortgage loan default accusations.

    Fixed Amount

    When you've put little or nothing down on your home, a fixed amount of coverage that meets your lender requirements, a minimum of your mortgage loan amount, might be sufficient. However, you must also protect your equity, or ownership amount. Therefore, you should purchase enough homeowners insurance to protect not just your mortgage balance but your equity in your home in the event of a major loss.

    Replacement Value

    Lenders seldom require that you purchase a replacement value insurance policy, but it behooves you to do so. Should you have a total, or almost total, hazard loss, this feature allows you to repair and rebuild at current prices, whether for materials or labor. While fixed amount homeowner's insurance coverage is cheaper, since the company has a fixed risk, the cost of materials and labor can spike up quickly, possibly forcing you to hit your bank account to replace or repair damage in full.

    Other Policy Requirements

    Often, your lender requires that you add addendums to your policy or to purchase additional hazard coverage. For homeowners insurance, if your home is in a so-called "disaster zone," your lender might require that you include some additional hazards to your policy. For example, lenders may require earthquake and hurricane insurance coverage, should your home be in a zone designated for high risks associated with these hazards.

    Flood Insurance

    All lenders require federal flood insurance if your home is in designated flood plain areas A or B, which indicate a propensity for flooding to occur. This federal program has become a standard lender requirement since the 1990s, and lenders sometimes require flood coverage even in flood plain C designated homes. Because most homeowners policies do not cover floods and the cost of the federal program is reasonable, all homeowners should consider buying this protection, whether or not lenders require this coverage.

    Loss Payee

    Your lender must be named as a "loss payee" along with yourself on required homeowners insurance policies. Should you suffer a covered loss, the insurance check will be made out to you and your mortgage lender. You are still covered, but your lender must sign off on the check to ensure that you use the proceeds to repair losses. Even if your lender requires receipt of the claim check, the bank will require that you provide evidence that you've made the necessary repairs before endorsing the check to you.

    About the Author

    For 34 years Bill Pirraglia served as a senior executive in the banking industry. Since 2005, he has authored articles, blog entries, tips and advice columns, SEO web copy and two published books. He specializes in personal and business finance topics, along with legal articles for clients large and small.

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