Why Do Lenders Require Homeowners Insurance

Catastrophes happen in homes every day, and the homeowners insurance industry pays countless millions of dollars’ worth of claims to cover costs related to unexpected property damage. When they do, they are not only helping you rebuild your home, but also protecting your investment. Consider what this fact means for a mortgage lender. 

When you finance your home, your lender has as much of an investment in your property as you do. Therefore, they want to see the home repaired so that you can both continue to occupy it and never renege upon your obligation to repay your mortgage. They will often require you to have homeowners insurance as a result. 

Protecting Your Investment in Your Mortgage 
By mortgaging your home, you rely on a bank to provide you with the loan to buy the property, and you are then responsible for repaying the loan to the bank. However, for as long as you have the mortgage, your bank has an investment in your home, and they want to keep it secure. As a result, they will usually require you to buy home insurance. 

Consider a scenario where you take out a mortgage worth $350,000. That is a $350,000 debt that the bank has assumed on your behalf. Therefore, they expect you to repay that money to them, which is why they might foreclose on you if you stop paying your mortgage. 

Still, consider what would happen if major property damage occurs in your home. Would you struggle to repay your mortgage? Would the repairs set you back a pretty penny? If so, that would lead to financial struggles that could put your ability to both repay your mortgage and live in the property in limbo. This makes the lender’s ability to recoup their investment a lot more difficult. 

However, home insurance is there to keep all parties in the deal on a stable financial footing. It will help you repair any property damage that might occur, and if your home itself is a total loss, then your plan will help you rebuild it. 

Depending on the nature of the property damage, your lender might be able to demand that remittance be made to them. This will usually occur when you decide that you should cut your losses and not rebuild your home. The settlement will go to the insurer and be used to pay off the outstanding debt on your mortgage. Therefore, they won’t suffer an undue loss just because you didn’t choose to rebuild. 

Still, regardless of whether your lender requires home insurance, you should still invest in it. All in all, it’s there to assist you in case of property damage, and ultimately can make you much more secure in your home. Don’t hesitate to work with your agent to get the policy that is best for you.