Unless you buy a home for cash, you'll have a mortgage lender who will mandate hazard insurance coverage equal to their financial interest. Your mortgage amount equals the lender's financial interest. Most mortgage lenders require that you offer evidence of a hazard insurance policy paid up for the first year before closing on your new loan. Should your lender learn that your hazard insurance coverage has lapsed, they will put insurance on your home at a high cost to you.
Minimum Hazard Coverage
While your lender will mandate hazard insurance coverage at least equal to your mortgage balance, you need to protect your equity sufficiently. If you buy a home with a low down payment loan, your equity will be small. However, if your loan-to-value -- your mortgage balance divided by the home's selling price -- is 80 percent or less, you must protect your 20 percent or more in equity. Your lender only cares about protecting against hazards, such as fire, floods and damage to the home, but along with your equity you should cover your personal property, including furniture, appliances and clothing.
Minimum Coverage Exceptions
Should your land value be extraordinarily high when compared to the value of your home, lenders may permit an exception to the mortgage balance minimum coverage rule. Since land cannot technically suffer hazard loss, lenders are concerned with your home structure only. Should your home be a modest structure, but located on waterfront or beachfront land, your land value may equal much of your mortgage balance. Lenders may allow you to purchase hazard insurance for less than your mortgage amount but still enough to protect lender financial interest in the home itself.
To ensure that you do not have a covered loss, the proceeds of which you don't use to repair damage, mortgage lenders require to be named as a loss-payee along with the homeowner(s). Should you experience a hazard loss, your lender's name will appear on the insurance check. This requires you to obtain their signature before cashing or depositing the claim reimbursement check. Be prepared to prove that you have repaired the damage before the lender will endorse the check.
Do not forget to pay your hazard insurance premium. Your insurance company will notify your lender that your coverage has lapsed or been canceled. Lenders will satisfy their hazard insurance requirements by "force placing" coverage on your home, and since lenders only care about mortgage balance protection, coverage they procure will protect neither your equity nor your personal property. Lender-placed hazard insurance is also very expensive, much more costly than your privately purchased coverage. You, not they, are responsible for paying for this coverage, the cost of which will severely dent your bank account.
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