Why Mortgage Lenders Require Homeowners Insurance

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There are several steps you can take to begin the process of preparation for mortgage. These include providing your lender with financial documents, including proof of payment and recent tax returns, as well as the home inspection process.

You will also need to put homeowners insurance in place before closing in a mortgage. And to be clear, this is not just to protect you – it is a requirement imposed by lenders.

Why so? The answer is simple.

Lenders need to protect themselves

Technically, you do not need a homeowners insurance policy to buy a home. But if you are financing a home equity loan, as opposed to buying real estate with cash, then you will need homeowners insurance to finalize this mortgage.

Never mortgage lenders give mortgages, take risks – that they will not be repaid. This is why borrowers with higher credit scores tend to be lower mortgage rates from those with poor credit. Higher credit means you are a less risky borrower in the eyes of lenders.

Now, if you are far behind on your mortgage payments, the only solution your lender can have to get his money back at that point is to force the sale of your home through a process known as foreclosure. But if your home has been demolished or destroyed, your lender will have no property to sell in this situation.

This is why mortgage lenders require home buyers to buy homeowners insurance. If your home is damaged and you have insurance, your home can be rebuilt. Without insurance, both you and your lender may not be lucky.

How much homeowner insurance do lenders require?

Mortgage lenders will generally require borrowers to obtain a homeowners insurance policy that covers 100% of the cost of replacing their home. In this way, a house can be rebuilt in case it is completely destroyed. The cost of a related policy based on this requirement will depend on where you live and the size and features of your home.

What if you do not get a home equity loan?

Even if you are able to buy a home in cash and therefore do not need to take out homeowners insurance, it is not a wise idea to give up this coverage. If your home is destroyed by fire or weather, you could lose hundreds of thousands of dollars if you need to rebuild it from scratch.

In addition, homeowner insurance protects you in the event of someone being injured on your property. Suppose a deliverer comes to your door to drop a parcel and slips on an icy track along your aisle. This person could sue you to cover his or her medical bills – but a homeowners insurance policy will generally get this card.

Now this does not mean that you should not try to save money when it comes to homeowners insurance and you can do this by shopping with different insurance companies for the best prices. But whether or not you get a mortgage, it’s worth putting homeowners insurance. After all, if lenders insist on this to protect their financial interests, you should invest in protecting your own.

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