If you're a first-time homebuyer and the mortgage process is new to you, you probably are not familiar with the term "mortgage hazard insurance." Understanding what hazard insurance is and how it affects you can help you be a responsible homeowner. If you're applying for a mortgage, this information is critical. Here's what you need to know.
Hazard insurance is a part of a standard homeowner's insurance policy. Hazard insurance covers the structure of your house itself, should the structure be lost due to fire, tornado or some other covered event. It covers only the structure, not the possessions inside. Other parts of a standard homeowner's insurance policy cover possessions lost due to a covered event and injuries that occur on the property.
Most mortgage lenders require home buyers to have hazard insurance before they will approve a loan. Because lenders sometimes refer to this requirement as hazard insurance specifically, this may have contributed to the notion that this type of insurance is separate from a homeowner's policy. In most cases, it is not. However, standard homeowner’s policies may not cover every conceivable hazard, so in some instances, it may be necessary to take out a separate policy if you desire coverage for a hazard that is not mentioned in your standard policy.
How does hazard insurance work?
You can look up your hazard insurance coverage by reading your homeowner’s policy. The amount of coverage should be detailed on the policy. Covered events should be detailed as well, so you will know when your policy will pay to rebuild your home and when it will not.
Should your home become damaged in a storm, wildfire, or some other covered event, you will submit a claim as part of the insurance company’s claims process. Claims processes differ with every company, but here's a general overview:
- Contact police if a crime has been committed. If your home has been damaged during the commission of a crime, your insurance company will likely ask to see a police report during the claims process.
- Contact your insurance company. Describe the damage and tell your representative that you want to make a claim.
- Fill out any claims forms. Most insurance companies have their own set of forms to document a homeowner’s claim.
- Prepare for a visit from a claims adjuster. Be prepared to show the claims adjuster any damage that you detailed on the claims forms.
- Meet with the adjuster. The adjuster will check to ensure that your claims are as they have been described and will determine the amount of the damage.
- Document the damage. Take pictures, save receipts, and write down what the claims adjuster has told you to do next.
- Work with a contractor to make repairs. When the payment from your insurance company arrives, this money can be used to pay the contractor.
Who offers mortgage hazard insurance?
Insurance companies that offer a standard homeowner’s insurance policy also offer supplemental policies to cover hazards that may not be covered in their standard policy. Homeowners also can pay for increased hazard coverage within their standard policy if the coverage for a certain covered event is not adequate.
Your mortgage lender is unlikely to require you to sign up with a specific insurance company. Keep in mind, though, that if your policy lapses after you've borrowed money for a mortgage, your lender may require you to pay for a policy through an in-house insurance company. Often, these policies are more expensive than standard policies. It's better for homeowners to get their own insurance whenever possible.
Should you get mortgage hazard insurance?
Homeowner's insurance can provide peace of mind to homeowners. Your home is an investment, and life without a homeowner's insurance policy can be risky. Any homeowner who does not have sufficient funds to repair or replace their home in the event of a disaster should consider getting a homeowner's policy that includes hazard insurance.
If you're a homeowner who has made an offer on a home and you're currently in the escrow period, your mortgage lender will almost certainly require you to have hazard insurance when escrow closes. If you don't have a homeowner's insurance policy at the close of escrow, you are not likely to get the loan.
It can take time to find the right policy at the right price. It's important to shop around during the escrow period to ensure that you get the best deal possible.