Why do mortgage lenders require home insurance?
There are several steps you need to take on the road to obtaining a mortgage. This includes providing financial documents to your lender, including payslips and recent tax returns, as well as going through the home inspection process.
You must also bet Homeowners Insurance on the spot before taking out a mortgage. And to be clear, this isn’t just to protect you — it’s a requirement imposed by lenders.
Why so? The answer is simple.
Lenders need to protect themselves
Technically, you don’t need home insurance to buy a home. However, if you are financing a home purchase with a mortgage rather than buying a property directly with cash, you will need homeowners insurance to complete that home loan.
When mortgage banks When you make a home loan, you take a risk—that you won’t be paid back. Because of this, borrowers with higher credit scores tend to stay lower mortgage rates than those with bad credit. Higher credit means you are less risky in the eyes of lenders.
Now, if you default too far on your mortgage payments, the only way your lender might have to get their money back at that point is to force the sale of your home through a process known as foreclosure. But if your home is damaged or destroyed, your lender has no property to sell in that situation.
For this reason, mortgage lenders require homebuyers to have home insurance. If your home is destroyed and you have insurance, your home can be rebuilt. Without insurance, both you and your lender can be out of luck.
How much home insurance do lenders charge?
Generally, mortgage lenders require borrowers to take out home insurance that covers 100% of the replacement cost of their homes. This allows a house to be rebuilt if it is completely destroyed. The cost of an associated policy based on this requirement will depend on where you live and the size and amenities of your home.
What if you don’t get a mortgage?
Even if you can buy a home with cash and therefore don’t need home insurance, it’s an unwise idea to forgo that coverage. If your home is destroyed by fire or a weather event, you could lose hundreds of thousands of dollars having to rebuild it from scratch.
Contents insurance also protects you in the event that someone is injured on your property. Let’s say a delivery man comes to your door to deliver a package and slips on an icy patch of your sidewalk. That person could file a lawsuit against you to cover their medical bills — but home insurance will generally cover that bill.
Now, that’s not to say that you shouldn’t try to save money when buying home insurance, and you can do so by checking out different providers insurance companies for the best prices. But regardless of whether you get a mortgage, it’s worth getting homeowners insurance. After all, when lenders insist on protecting their financial interests, they should be invested in protecting yours.
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