The Role of Home Insurance in Mortgage Approval

Purchasing a house is a milestone in life, and obtaining a loan is another huge milestone in that adventure or journey. But before the lender issues you the loan, you will need to provide or purchase an important thing: home insurance. Many buyers are surprised to find out that home insurance coverage is not optional when trying to secure a loan. Home insurance is required to protect you and the lender from financial loss.

Why do Mortgage Lenders Require Home Insurance

When a bank or mortgage lender lends money to a buyer to purchase a home, they are essentially taking on a financial risk. The bank owns the home until a buyer pays off the mortgage loan. Home insurance coverage protects the homeowner and the home loan lender in the event that the house catches on fire or is damaged from a natural disaster or theft. Without valid homeowners' insurance, the lender risks losing their collateral (the home). Typically a mortgage lender will require proof of insurance coverage prior to closing on any loan.

How Does Home Insurance Protect You?

Home insurance protects your house and provides coverage for your personal belongings, liability if someone gets injured at your home, and for temporary housing if you are unable to stay at your house because of a covered loss.  Beyond that, most home insurance companies offer flexible plans, so you have options on coverage limits, endorsements, and deductibles that fit your budget. When shopping for insurance quotes, look past the price and focus on the level of protection offered.

Proof of Insurance: What will Lenders Need?

Before you receive final mortgage approval, the lenders generally will request the following:

1. Proof of coverage – This can be the insurance policy you purchased or a binder from the insurance company.

2. Mortgagees clause – This means you will need to put the mortgage company on the insurance policy as a payee if the coverage is paid out for damage.

3. Coverage verification – This is the confirmation that the home insurance policy covers the replacement cost of the home or has a coverage value greater than the replacement cost value of the home.

If you don’t provide proof of insurance by closing, your lender may purchase a policy on your behalf, known as lender-placed insurance. However, these policies are often more expensive and provide less protection, so securing your own policy is always the smarter choice.

Suggestions for Selecting Appropriate Home Insurance

• Evaluate home insurance estimates from several insurance carriers to identify the greatest blend of cost and coverage.

• Combine policies (auto and home) for savings.

• Inspect appropriate limits to confirm that the insurance covers the present worth for both your home and personal property.

• Ask about deductibles, exclusions, and inadequate add-ons such as flood or earthquake insurance.

Conclusion

Home Insurance is a key part of the mortgage approval process. It meets the lender's requirements, but also protects your most valuable investment, your home. You can find a policy that provides the correct protection and peace of mind for years with the support of a reputable home insurance company and by comparing various home insurance quotes.