How much coverage will your lender required for Home Owners Insurance?
Home Owners Insurance is sometimes referred to as a “Hazard Insurance”. This policy is what your lender requires to cover your new home in case of fire or property damages.
There are two ways in which lender view this coverage and that view varies from lender to lender.
The first method of determing coverage is quite simple:
If your loan amount is $500,000 then your insurance coverage must match the amount being loaned to you. In this case that would be $500,000 in coverage. This method is typically more expsive for you, the buyer.
The second method factors in the cost of the land and cost of dwelling:
This is particularly important in areas where the cost of the land is significant. This method requires data be used from the appraisal. The appraisal will separate land value and structure value.
Here’s in example:
The appraisal states the land or site value at $150000 and the structure value at $350,000. In this scenario, the lender would require coverage of $350,000 to cover their collateral as the land alone would not typically be damages by fire or other peril.
Obviously this method has a lower cost to you because the required coverage amount is less. If your lender says they require the first of these methods, try asking if they would consider the second method.
Also be aware of how important it is to choose an insurance agent with lots of experience and has your best inerest at hear to help you navigate this important piece of your mortgage transaction.