Home loans and homeowners insurance go hand in hand. When you take out a loan to cover the cost of a house purchase, the lender will require you to have the property insured with a homeowners insurance policy. It’s a minimum requirement for most mortgage loans these days. Here is an updated look at home insurance requirements for mortgage borrowers in 2015, along with the average cost of coverage.
Definition: Homeowners insurance, also referred to as “hazard insurance,” is a type of coverage that protects a home and the contents within it. Most of these policies consist of a package of individual coverage types. They can insure financial losses resulting from damage to the property itself, personal injuries, loss of personal property within the home, and more.
Average Cost of Home Insurance in 2015
The average cost of a homeowners insurance policy in 2015 will vary based on the types and amount of coverage selected.
The premium cost also depends on the size of the deductible. Generally speaking, a higher deductible will result in a lower annual premium.
According to a nationwide study conducted by the National Association of Insurance Commissioners (NAIC), the average home insurance premium was just over $1,000 per year.
Premium prices vary from state to state as well. In the most recent national survey, Florida took the “honors” as the most expensive state with an average cost of nearly $2,000 per year. This is partly due to the prevalence of property-damaging storms in that part of the country.
Idaho had the lowest average cost of home insurance, at $518 per year. As you can see, there is a fairly broad spectrum between the highest and lowest. So geography plays a big role.
Standard Requirement for Conventional Mortgage Loans
Mortgage lenders typically require borrowers to have a homeowners insurance policy in place prior to closing. This is a standard requirement across the lending industry, and with good reason. In a typical loan scenario, the lender invests more into the property than the home buyer does. A borrower might put down 20% of the purchase price, while the mortgage company funds the other 80%.
Lenders carry the lion’s share of risk, at least initially. So they want to have a certain amount of protection in place before the loan closes. This protection comes in the form of a homeowners insurance policy, the cost of which is borne by the buyer.
This is a standard insurance requirement for mortgage borrowers in 2015. While lenders have relaxed their criteria in other areas, such as credit scores and debt ratios, we have seen no signs of easing where homeowners insurance policies are concerned.
Bottom line: home buyers who use loans to cover their purchases should expect to have a policy in place prior to closing.
How Much Coverage Do You Need?
The minimum requirement for homeowners insurance varies from one lender to the next. It also varies based on the type of loan being used (VA, FHA, conventional, etc.).
In most cases, mortgage lenders will require the borrower to have insurance equaling the amount of the unpaid mortgage debt. But this is just the lender’s requirement. Homeowners would be wise to obtain enough coverage to replace the home, in the event it was completely destroyed by fire or some other insured calamity.
But again, these guidelines can vary. Some lenders have higher coverage requirements. According to Federal Title and Escrow Company:
“The amount of insurance coverage must at least equal the lesser of (1) 100% of the insurable value of the improvements as established by the property insurer; or (2) the unpaid balance of the mortgage, with a replacement cost endorsement to compensate for the full amount of damage or loss to improvements.”
The policy must also refer to your mortgage loan / account number. Be sure to provide this information to your insurer when purchasing the policy.
Borrowers are typically required to provide proof of homeowners / hazard insurance on, or prior to, closing day. Acceptable forms of proof include certificates from the insurer, policy binders, declaration pages, and the policy itself. The lender must be satisfied that the home is properly covered, before they will fund the loan.
FHA Hazard Insurance Requirements for 2015
Loans insured by the Federal Housing Administration (FHA) have similar home insurance requirements to conventional mortgage loans. In fact, the Department of Housing and Urban Development (HUD), which manages the FHA program, does not have any specific guidelines as to the minimum amount of hazard insurance the borrower must have. So it tends to fall back on the lender.
FHA borrowers are also required to pay a mortgage insurance premium, or MIP, but this should not be confused with the homeowners policy. They are two separate things entirely. While borrowers pay for both of these policies, they only receive coverage from the home insurance policy. The MIP protects the lender, in the event that the borrower defaults, or stops paying, on the loan down the road.