Mortgage lenders require hazard insurance to protect against the loss of a home due to fire, storm or other calamity. It usually is the part of a homeowners policy that covers the physical structure of the house, not its contents. Other parts of a homeowners policy insure personal property or cover liability for damage or loss to others. You'll have to provide proof of hazard insurance when you finalize your mortgage unless you make a high down payment.
Basic homeowners insurance covers hazards such as fire, wind or hail, but does not cover flooding, hurricanes or earthquakes. If your house is in peril from these hazards, in a flood zone or area subject to hurricanes or earthquakes, your lender may require extra hazard insurance to cover these events. Such coverage may be added as a special endorsement or clause or may be a separate policy.
Cover the Loan
Lenders typically require hazard insurance to cover a house for at least the amount of the mortgage. You can choose any insurance company you want, so long as it covers the mortgage or the replacement cost of the house and your lender accepts it. You choose the policy, subject to the lender's approval, and its cost will be added to your overall monthly payment. In case of a loss, the insurance will be used to repair or rebuild the structure, or to pay off the mortgage loan.
If your homeowners policy is not sufficient, a lender may institute a forced insurance policy. This forces a borrower to insure the house with a lender-specified policy to guarantee the lender won't lose money if the house is destroyed. That policy may replace or supplement your regular homeowners insurance, but covers only the structure, and its premium is added to your house payment. Most insurance companies require the policy be at least 80 percent of the replacement cost.
Some lenders carry blanket mortgage hazard insurance. This is a policy, issued to the lender, that covers all the mortgages in its portfolio. It's an extra protection for the lender, in case individual mortgage holder policies will not cover 100 percent of a loss. Some lenders with this type of insurance will allow you to be covered under this policy but will charge for it.
Bob Haring has been a news writer and editor for more than 50 years, mostly with the Associated Press and then as executive editor of the Tulsa, Okla. "World." Since retiring he has written freelance stories and a weekly computer security column. Haring holds a Bachelor of Journalism from the University of Missouri.