Mortgage Loan

Few of us can afford to buy our first home using cash. Many buyers will rely on a bank or other mortgage lender to provide them with financial support. However, the bank will also expect the mortgage recipient to do their job in home protection. They'll likely institute a requirement for the buyer to carry homeowners insurance. Why does this rule exist?

With a mortgage, homeowners owe the bank a debt in the form of the home. Thus, any problems in that home represent a potential loss for the mortgage lender. So, the rule for home coverage helps the lender protect their own investment and encourage owners to do the same.

Why Coverage Requirements Exist

When you take out a mortgage to pay off a home, it is not your own money that you will use. Instead, it's the bank's money on loan to you. The bank expects you to repay that sum over the years. If they don't get that money back, that could be a problem for both you, as the homeowner, and the lender.

To your bank, the house itself represents money. It probably does to you, too. Neither party wants to see anything bad happen in the home. Even so, most banks understand that no one can prevent every accident.

That's where the requirement to carry homeowners insurance comes into play. With coverage, you can get financial help cleaning up after unexpected damage. You will also likely be able to rebuild and repair the home to your satisfaction. That's not only a benefit to you, but also to the bank.

If you have home insurance, you can generally return the home to a secure value. Furthermore, you might even cut your own risk of defaulting on a loan or abandoning the property. Given that such actions often prove detrimental to both you and the bank, getting coverage often puts you both in a safer position.

What Protection You Need

All banks will require different amounts of homeowners insurance. However, they generally will want you to carry:

  • Property Insurance to pay for repairs to the dwelling and other structures.
  • Liability Insurance for the personal risks you cause to others.
  • Possessions Insurance to cover your belongings in the home.

Generally, your coverage level must exceed the value of the mortgage. However, you can work with your agent to determine the coverage that will give you most financial return following a home loss. By adjusting your deductibles, limits and other options, you can protect both yourself and the lender.

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