A Guide to Mortgage Lender Requirements & Homeowners Insurance

A man looks through his mortgage lender requirement documents to determine how much homeowners insurance is required

More often than not, people use a mortgage lender when purchasing a new home to handle offers and underwriting of a home loan. In order to protect not only your investment, but the mortgage lender’s as well, you’ll be required to have a homeowners insurance policy. Here’s a guide to mortgage lender requirements and homeowners insurance. 

Is homeowners insurance required by a mortgage lender?

Mortgage lenders often require home insurance to make sure the home they have invested in is fully covered in the event of catastrophic damage. It also shows that you’re financially capable of paying down the mortgage in the event that the home is destroyed. 

Mortgage Lender Requirements for Home Insurance

Your mortgage lender will require that the dwelling portion of your policy protects against the following incidents:

  • Fire and lightning
  • Damage from wind and hail
  • Theft and vandalism
  • Falling objects
  • Damage from weight of snow, ice, or sleet
  • Frozen pipes
  • Vehicles
  • Riots or civil unrest
  • Smoke damage
  • Explosions

How much home insurance does a mortgage lender require?

Each mortgage lender will have different requirements for home insurance, but they will typically require your home insurance to cover the equivalent of or less than the following:

  • The full replacement cost of your home, which is determined by the insurance company
  • The unpaid balance on the mortgage

Will mortgage lenders require me to purchase any additional insurance coverage?

If your policy excludes any of the incidents listed above, your lender may require you to fill the gaps in your coverage with additional insurance policies. If your home is located in a high-risk zone susceptible to flooding, earthquakes, hurricanes, etc., your mortgage lender may also require you to get separate insurance to cover these potential risks.

When should I get home insurance?

Your mortgage lender will let you know their homeowners insurance policy requirements prior to closing so you can make sure your policy is in place. Once you’re aware of the requirements, you’ll want to shop around to get the right coverage at the best price available to you. 

How to Calculate Your Home Insurance Coverage Needs

When deciding on a homeowners insurance policy, you should consider all of your needs as they relate to each of the four basic types of coverage. It’s important to know that your insurance isn’t necessarily based on the current value of your home or your mortgage, but that it’s based on what it would cost to recreate your home in the event of a disaster. The four basic types of home insurance coverage are:

  • Dwelling: The coverage limits on your home insurance policy are based on your dwelling coverage, while the limits for other coverages on your policy are typically calculated as percentages of your dwelling limit. 
  • Personal property: For personal property coverage, you’ll want to take inventory on all of your belongings and estimate the costs of everything. It’s easy to underestimate how much we own, so it’s important to take detailed notes of everything to make sure you have enough coverage in the event of potentially losing it all.
  • Liability: Liability loss claims can often be the most expensive home insurance claim. When deciding how much personal liability coverage you need, you’ll need enough to cover your total combined assets. You’ll also want to consider the liability risks attached to your home, such as something like a pool, trampoline or treehouse. 
  • Loss of Use & Additional Living Expenses: Loss of use and additional living expenses coverage can help pay for lodging, meals, animal boarding, and any other expenses that arise in the event you’re unable to stay in your home. This can come after a natural disaster or other unpredictable event over which you have no control. 

Our coverage quiz can help get you started on determining how much home insurance coverage you need. 

Secure the Right Amount of Homeowners Insurance Coverage with SelectQuote

Securing home insurance can seem complicated, but it doesn’t have to be. At SelectQuote, we simplify the process by getting to know your needs, understanding your mortgage lender’s requirements and finding you the best homeowners insurance available to you from the trusted insurance companies we work with.

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