When you finance a home, the property becomes the collateral for your mortgage. Lenders require home insurance (often called homeowners or hazard insurance) to ensure that, if a covered loss occurs—fire, wind, or certain types of water damage—the home can be repaired or rebuilt. This protects your investment and the lender’s financial stake simultaneously.

The Lender’s Priority: Preserving Collateral Value

Mortgages are long-term agreements, and a significant loss to an uninsured home would put repayment at risk. By requiring a policy, lenders reduce the risk that a catastrophic event wipes out the collateral’s value. With dwelling coverage, replacement cost options, and a reasonable deductible, the policy helps keep the structure livable and the asset viable, thereby maintaining stable loan performance.

Typical Requirements: Minimums, Escrow, and Proof of Coverage

Most lenders outline minimum dwelling coverage that aligns with the cost to rebuild, not just the home’s market price. Many also request liability protection and may specify endorsements based on location risks. To simplify payments, lenders often collect premiums through an escrow account and pay the insurer on your behalf each year. You’ll need to provide proof of insurance before closing and keep the policy active throughout the life of the loan.

What Happens If Coverage Lapses: Force-Placed Insurance

If your policy cancels or expires, lenders can purchase force-placed insurance to fill the gap. This coverage protects the lender but is typically more expensive and may offer less protection for your personal property or liability needs. To avoid higher costs and limited benefits, it’s crucial to maintain your own policy, review limits annually, and update coverage as renovation costs and local building codes change.

Home insurance isn’t just a box to check for closing; it’s an ongoing requirement designed to keep your property and loan secure. By choosing appropriate dwelling limits, reviewing endorsements for local risks, and maintaining current premiums via escrow, you protect your home’s condition, your equity, and your long-term financial plan.

Make Compliance Easy with Koda Insurance Services

Mortgage lenders require home insurance because your property secures the loan; if a covered event like fire or wind damage occurs, the policy helps repair or rebuild so the home’s value—and the loan’s collateral—stay intact. Koda Insurance Services can help you select the proper limits, endorsements, and deductibles for your location and budget so you remain compliant and protected. Call us today at (619) 600-5550 or complete our online form to get started.