So you’re ready to buy your dream home, or your dream investment property. Your credit has been checked, your down payment and assets have been meticulously reviewed and your employment has been verified by the underwriter.
It’s almost time to close on your loan, thank goodness. This is around the time when your loan officer tells you to it’s time to get your insurance lined up. Specifically, he or she tells you to get a “hazard insurance policy.”
Err…what? I thought I needed a homeowners insurance policy for my property. It is, after all, going to be my home. What is a hazard policy? I’ve never heard of such a thing.
What Exactly Is Hazard Insurance?
- While homeowners and hazard insurance might be used interchangeably
- Especially by loan officers and mortgage brokers who aren’t insurance specialists
- We’re actually talking about two different types of coverage here
- Hazard insurance only protects the structure itself, aka the mortgage lender’s interest in your property
Hazard insurance is an absolute requirement when purchasing a new home with a mortgage loan. It is all too obvious that you don’t actually “own” your home when you sign on the dotted line for that 30-year mortgage.
The reality is the bank owns your home until the mortgage is paid off. While the bank is “nice” enough to lend you a couple hundred thousand dollars, they certainly would not give you a dime unless you have insurance in place to protect “their” investment.
Put another way, your bank thinks you might not pay them back if your new home burns down and an insurance company doesn’t swoop in to rebuild it for you.
Without hesitation, you contact your insurance agent and ask about getting a hazard insurance policy. Long story short, you wind up getting a homeowners insurance policy and your lender is ready to close your loan.
This may be the point where you wonder why your Loan Officer asked for hazard insurance and your agent never once used the word “hazard,” but referred to your policy simply as “homeowners insurance.”
You might even be thinking you don’t have the right kind of insurance. The good news is you’re all set, because a homeowner’s insurance policy not only covers the requirements of hazard insurance, but also goes far beyond that.
Hazard Insurance Is Not Homeowners Insurance
Careful review of the information above will show you that your bank is ONLY concerned with insuring their asset, which is the physical structure you live in, that they lent you the money to purchase.
Hazard insurance is designed to cover only the structure your bank “owns” until you pay them back.
Whether you decided to stay and rebuild or move to another state after the damage occurred, your insurance company would pay to have the home rebuilt and your bank would still have an “asset” to sell to someone.
You may be wondering why you would need any insurance beyond the basic hazard insurance policy to cover the dwelling you live(d) in? Well, what about all of your personal possessions and the liability you assume by owning property?
That’s right…a hazard insurance policy does absolutely nothing to cover your personal possessions or your assumed liability for owning a home. You would need a homeowners or landlord’s insurance policy to insure you against these perils.
While your loan officer may not sit you down and explain this to you in detail, the insurance industry has got you covered.
We won’t spend a lot of time going through the details here, but just know that your lender will give you the money to purchase a property whether you insure your interests (personal property and liability) or not. They are only concerned with their asset.
This is why a lender forced insurance policy doesn’t cover your personal property or liability. This is the insurance your bank will put on your home if you don’t maintain insurance on your home.
Homeowners Insurance Is What You Actually Need
- Your mortgage lender doesn’t specialize in insurance
- They simply need to ensure that your property is properly insured
- In case something happens that affects their financial interest in it
- Your insurance agent or company will know what type of coverage you need
There’s really no need for concern here, as there aren’t really any insurance agents out there who can offer a true hazard insurance policy.
It comes down to semantics, but at the end of the day, insurance companies are going to offer you a homeowner’s insurance policy.
Your basic homeowner’s policy is designed to include coverage for your personal property, liability, loss of use and other basic types of coverage the average homeowner needs.
Again, no need for concern here, as homeowners insurance is exactly what you need to be as protected as possible.
Your lender doesn’t specialize in insurance; they specialize in closing your loan. There is no way a lender can “force” you to buy insurance for your home’s contents and your liability…so they don’t. They simply require a hazard insurance policy.
Don’t give it a second thought. Insurance companies don’t even really sell “hazard” insurance. The only way you’ll wind up with this inadequate coverage is if you don’t pay your insurance premium and your mortgage lender places your insurance.
Even then, you’ll receive a letter from your lender in the mail that specifically details the fact that they are forcing you into this type of policy, and that they’re going to charge you a lot of money for it.
And that it only covers the actual structure they own…heck, they’ll even tell you to go get a regular homeowners insurance policy, which is really what you need.
Tip: The premium for lender forced coverage is simply added to your monthly mortgage payment. If you don’t keep up with those payments, you’re on your way to foreclosure.