Hazard Insurance

Hazard Insurance

By law, hazard insurance which is also referred to as Homeowners Insurance (HOI) is required on every home in which there is a mortgage loan.  Having proper coverage in not only important for protecting the homeowner, but also for protecting the lender; therefore, before a lender approves any loan, this particular item is thoroughly examined.  Let me discuss further. 

Another term often used when discussing hazard insurance is a fire policy.  This is important because most hazard insurance policies do not cover other disasters like flood or wind.  A flood or wind policy is something that would be an addition to a fire policy.  Today I will discuss only hazard insurance and leave these additional items for another time.

Insurance concept -  house under umbrellaAs I previously mentioned, hazard insurance (HOI) is required on every home in which there is a mortgage loan by law.  So what happens if a lender discovers that a borrower is not covered by insurance?  In this situation, the lender has the right to do what is called “force place insurance.”  This is where the lender forces the borrower into a policy and makes them pay for it.  This is often handled through an escrow account and results in a substantial increase in the borrower’s monthly mortgage payment; due to the fact that force place insurance is very expensive.  Important to note, this is only when there is a home involved in the loan.  If the loan is for only land, then this would not be of any concern due to the fact that one can’t insure land.  The coverage covers only the improvements (house) not the land, dirt, rocks, etc.

Aforementioned, an HOI policy not only protects the homeowner but also the lender.  This is identified through the mortgage clause which discusses the Loss Payee (the lender).  This clause states that the insurance that is needed needs to cover the lender’s interest in the property and must cover at least the loan amount of the home.  The lender can not ask a borrower to take out more insurance than the minimum required insurance.

In a purchase transaction, the borrower will need to pay one full year premium up front.  Then for subsequent years, the next premium will be paid in one of two ways.

  1.  With an Escrow account on the loan:  Escrow account in this context is an account setup to collect monthly payments of taxes and insurance with the mortgage payment.  Remember “force place insurance” coverage?
  2. Out of the borrower’s own money:  This method requires the borrower to be more disciplined by setting funds aside on their own, so at time of renewal they will not be caught off guard.  This method also is considered to be a more risky loan to the lender and may warrant an increased interest rate on the loan.

Not sure who to call or where to start? Contact me today for a 100% free no-obligation loan inquiry analysis.

Matt Pell,  Loan Officer
Mortgage Warehouse, LLC
(239) 672-8502 – Direct Line
(239) 344-9223 – Fax
Company NMLS ID – 137154
Individual NMLS ID – 1018529
Better Business Bureau Rating = A+

Posted on October 14, 2013, in Finance and tagged , , , , , , , , , , , , , , , . Bookmark the permalink. Leave a comment.

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