Homeowners Insurance Requirements for a Mortgage

Why do lenders require homeowners insurance?

Because the property is collateral for the loan, lenders want to ensure it is protected against major damage or loss, such as from fire or storms. A lender will generally require proof of an active homeowners insurance policy before closing, and will often require that the policy remain in force for the life of the loan.

What coverage types are typically required or recommended?

• Dwelling coverage: pays to rebuild or repair the structure itself.
• Liability coverage: protects against certain claims if someone is injured on the property.
• Personal property coverage: covers belongings inside the home, though limits and specifics vary by policy.
• Loss of use coverage: may help with temporary living expenses if the home becomes uninhabitable after a covered event.

Dwelling coverage vs. market value: what's the difference?

A common point of confusion is that lenders typically require dwelling coverage based on the cost to rebuild the structure, not the property's market value or purchase price. These two numbers can be quite different, since market value includes land value and local market conditions, while rebuilding cost focuses only on construction materials and labor to reconstruct the home. This is why a homeowner might see a required coverage amount that looks different from what they paid for the home.

How does escrow work with homeowners insurance?

Similar to property taxes, many lenders collect a portion of your annual homeowners insurance premium each month as part of your mortgage payment, holding it in escrow and paying the insurer when the premium is due. If your premium increases at renewal, your monthly escrow payment may be adjusted accordingly.

When is flood insurance required?

If a property is located in a designated flood zone, lenders are generally required to mandate flood insurance as a condition of the loan, separate from a standard homeowners policy, which typically does not cover flood damage. Flood zone determinations are made during the loan process, and it's worth asking early if a property's flood zone status is unclear, since it can affect your total insurance cost.

What about deductibles?

Your policy's deductible is the amount you would pay out of pocket before insurance coverage applies to a claim. Choosing a higher deductible can sometimes lower your premium, but it also means more out-of-pocket cost if you need to file a claim. Lenders may have limits on how high a deductible they will accept relative to the coverage amount.

Specific coverage requirements, flood zone determinations, and premium amounts vary by lender, property, and insurer. Confirm requirements with your lender and insurance provider directly.