When you finance a home with a mortgage, your lender requires you to carry property hazard insurance to protect their investment—the home itself. These insurance requirements ensure that if damage occurs due to events such as fire, windstorms, or theft, the property can be repaired or rebuilt, thereby safeguarding the lender’s collateral.
Property hazard insurance requirements specify the minimum coverage and policy terms your homeowners insurance must fulfill. These usually include sufficient dwelling coverage based on Replacement Cost Value (RCV), naming the lender as the “loss payee” on the policy, proof of payment of premiums, and coverage against common hazards. This coverage is a component of your standard homeowners insurance (often the HO-3 policy) that insures the physical structure of your home.
Lenders provide their insurance requirements early in the mortgage process, and you must show proof of meeting them—typically the insurance binder or declarations page—before closing. Often, lenders include your insurance premiums in an escrow account, collecting part of your mortgage payment monthly and paying insurance premiums and property taxes on your behalf to avoid policy lapses.
Common mistakes borrowers make include underinsuring their home by choosing coverage based on market value rather than rebuilding cost, allowing their policies to lapse—potentially leading to costly force-placed insurance—and failing to inform lenders when switching insurance providers. Federal law prohibits lenders from requiring you to use a specific insurance company, but they can mandate coverage levels and policy features.
For more details on the insurance documents needed at closing, see our article on Insurance Binder for Mortgage Closing. To understand the concept of forced-place insurance when a borrower fails to maintain coverage, visit our Forced-Place Insurance page. Additionally, learn about how escrow accounts work to manage your insurance and taxes in our Escrow Account glossary entry.
References:
- Consumer Financial Protection Bureau: What is hazard insurance? (https://www.consumerfinance.gov/ask-cfpb/what-is-hazard-insurance-en-1988/)
- IRS Publication 530: Tax Information for Homeowners
- Investopedia: Hazard Insurance Overview (https://www.investopedia.com/terms/h/hazardinsurance.asp)
