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Avoiding a Homeowners Insurance Disaster When You Apply for a Mortgage

Tredyffrin Easttown home buyers, a great answer to why you need to obtain home owners insurance from a mortgage professional.


Avoiding a Homeowners Insurance Disaster

When You Apply for a Mortgage


 Mortgage Documentation Checklist
When buying and financing a home, prospective Borrowers are required to produce a variety of documentation  and information to their Lender at the time of application and prior to the Closing of their loan.  In almost all cases, Homeowners Insurance is included within that documentation requirement.  

What service does Homeowners Insurance provide? Why is that service so important?

Homeowners Insurance policies offer multiple types of protection and coverage to an insured borrower/home owner.  Those include:

  • Coverage on the STRUCTURE of the home
  • LIABILITY protection
  • LIVING EXPENSES, should the homeowner be displaced from their home because of disaster 

How is Homeowners Insurance paid for?

You've probably heard or seen the acronym, "PITI" when reading and learning about mortgages and monthly payments.  This is especially true if you're a first-time home buyer.  "PITI" equals all portions of a monthly mortgage payment. 

PITI stands for:  

  • Principal
  • Interest
  • Taxes
  • Insurance  

Homeowners Insurance makes up the 2nd "I" within that acronym. 

Once the first year of insurance premium has been paid for prior to (or at) the Closing of a loan, monies must be set aside to pay for future insurance premiums when they come due.   Homeowners Insurance (and real estate taxes) are typically paid for via an escrow account

The escrow is established at the time of the Borrower's Mortgage Closing.  Escrow Accounts must be established if a Loan-to-Value is greater than 80%   (meaning a Borrower made a Down Payment on their home purchase of less than 20%).  
Those that make a Down Payment of 20% or more can choose to pay Taxes and Homeowners Insurance on their own without the establishment of an Escrow Account.  If this method of payment is chosen, proof of Real Estate Taxes and Homeowners Insurance payments must be provided to the Mortgage Lender. 

But once again, escrow payments for Homeowners Insurance only take place once the first year's insurance premium is paid prior to/at  Closing ... and an escrow account is established to pay for future premiums.

How much coverage does a Mortgage Lender require on a Homeowner Policy?
Most Lenders require that the insurance coverage for a Borrower's Homeowners Policy be in an amount that covers the rebuilding of the home should a disaster occur.  Or at minimum, the mortgage amount on the property.  (The insurance premium, and thus the insurance portion of a Borrower's PITI, is determined by the amount of coverage held on the Borrower's property.)
For some Borrowers:  Additional insurance coverage may be required by a Lender, if the home mortgaged lies within a designated disaster zone, such as flood, earthquake, or hurricane.  In the Chicagoland - Illinois area:  Flood Insurance is the most commonly added and required disaster zone coverage I see as a Mortgage Originator.
So  The Importance of Insurance Coveragewhy do Mortgage Lenders have this Homeowners Insurance requirement?
It's common sense really ...
The Mortgage Lender's collateral for the loan made is the physical structural home itself.
Should a disaster occur:  No home = little or no value attached to the remaining property.  Mortgage Lenders need this protection in place for their collateral investment.  That is why most Mortgage Lenders require you provide them a paid receipt proving payment for the full 1st-year annual premium on your Homeowners Policy.
They also require that you provide a Homeowners Policy (Doc Page or proof thereof) showing them as "loss payee or Mortgage Payee" (along with yourself) on your Homeowners Insurance Policy.  This must be provided prior to Closing.
Why does a Lender want this tangible proof beforehand?  Via your Homeowners Policy, the collateral property the Mortgage Lender holds (your home) is completely insured and covered from the moment you close on your loan.
That's where the "loss payee/mortgage payee" clause comes in ...
Because of that clause, if damage or disaster occurs to your property, any check from your insurance provider (typically made out to you and your Lender) will ...
  • First:  Pay off the outstanding mortgage debt 
  • Second:  Or pay for needed repairs to restore the property
  • Third:  Go to the Borrower/Owner

It's clear that Homeowners Insurance ... and proof of its annual premium payment ... is vitally important.  So much so, that a Mortgage Lender may not schedule your Closing without it.  

Mortgage Underwriters may hold up a "Clear to Close" until it's received.  It's certain that a Lender will not fund at the time of your Closing if this requirement is not successfully completed.  

(Paying for Homeowners Insurance at the time of Closing, or before, is typical - but rarely, special allowances get made for cases to be paid afterward.  Please ask me for further details regarding this.)

Be aware:  Mortgage Lenders require that you carry Homeowners Insurance throughout your entire mortgage term.  No lapses in coverage are allowed.  

Should you not provide your Lender with a policy or should one lapse, they are allowed to buy insurance for you ... and charge you accordingly.  They do, however, have to provide you advance notice of doing so. 

I've found that Homeowners Insurance is one portion of the mortgage process that seems to stump or trip-up many of my clients.  For that reason, I strongly suggest you act proactively and seek your Homeowners Policy as soon as requested.  

Where do you start?

Contact your insurance agent.  Should you or your agent require additional information regarding the requirements of your Homeowners Insurance Policy, contact me immediately.  You don't want to run the risk of holding up your Mortgage Closing for something as simply arranged for as your Homeowners Insurance. 

If you do not have a preferred agent:  Please let me know.  I'll be happy to refer you to an experienced, qualified Chicagoland insurance agent that can assist you with your insurance needs. 

I hope this information proves useful to you as you head into your home buying and mortgage financing process.  I look forward to talking with you soon and working together towards a successful Closing of your loan ...


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*  Hoping to Buy or Refinance a home in New Lenox, Will County, or elsewhere in the Chicagoland area?  Contact me today!  I'll put my 40+ years of mortgage experience and expertise hard to work on your behalf.

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Gene Mundt

Mortgage Originator  -  NMLS #216987  -  IL Lic. #031.0006220  -  WI #216987

American Portfolio Mortgage Corp.

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Gene Mundt

 Mortgage Originator  -  NMLS #216987    

                                   IL Lic. #0006220  -  WI License                                                                                                     

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Comment balloon 6 commentsNick & Trudy Vandekar, 610-203-4543 • March 15 2017 05:01PM
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