Let me start by saying that I’m not in the insurance business, but that the insurance business is in mine. And my business is helping home buyers and homeowners get a great mortgage. So just what are the insurance requirements when you buy a home or go to refinance a mortgage on residential real estate you own in California? Why does your lender care about the insurance coverage you keep?
Also known as “hazard insurance,” or “fire insurance,” this is the key policy you will be required to carry if you have a mortgage. While the actual coverage may seem to be a clear benefit to you, there’s a mutual benefit for the lender. After all, the home is both where you live and the collateral for the lender’s loan. Without the home itself, it’s unlikely the lender would/could ever be paid back in the event of a loss. By this logic, some homeowners who are “free and clear,” meaning they have no mortgage, will opt not to carry a homeowner’s policy. In the event of a total loss from a fire, for example, they would be completely out of a place to live with no reimbursement for loss of its use. Ouch.
If your lender determines that your property is in a FEMA special flood hazard area, you’ll be required to carry flood insurance. Regulation requires that mortgage servicers impound your flood insurance premium even if your homeowner’s insurance and property taxes are not impounded (aka “escrowed”).
Earthquake insurance is not required by lenders in California, even though the risk of earthquake damage is real in many areas. You can, at your discretion, purchase earthquake insurance but only about 10% of CA owners will choose to do so.
When you buy a home and use financing, you’ll be required to get a “lender’s” title insurance policy. This protects the lender from title defects and future claims against the title (which, like with homeowner’s insurance, could jeopardize their rights to the collateral). You’ll notice that you’re also being quoted an “owner’s” policy, which is technically optional. The vast majority will purchase this coverage too, and with good reason. Should anyone claim an interest in your property down the road, the owner’s policy would provide you cover and the title insurer would step in to deal with the claim. Worth noting is that the owner’s title insurance policy is in effect for the time you own the home. The lender’s policy is in place for the time you hold the specific loan involved in the transaction. If you refinance, you would purchase only a new lender’s policy.
Like earthquake insurance, life insurance is not required when you take on a mortgage. Also like earthquake, it may not be a bad idea. Life insurance can help a surviving spouse pay off or better manage the payments on a loan in the event of the death of the other spouse, and you can make a very good argument that life insurance is an incredibly responsible financial purchase to consider at the time of home ownership. We work with some great life insurance agents on a regular basis, so ask if you need a recommendation.
Private Mortgage Insurance
I am including private mortgage insurance or “PMI” in the insurance category because it makes sense that when borrower looks at the voluminous paperwork involved in buying a home, all of the insurance terminology starts to look the same. But PMI is exclusively related to your mortgage and if you’re putting at least 20% down and/or not using an FHA loan, you may not have PMI at all. So the best way to look at PMI is not as an insurance coverage required by the property, but one sometimes required by the loan. You also do not need to “shop” for PMI like you would any of the other insurance types listed above, like homeowner’s. Your lender should always attempt to find the least expensive private mortgage insurance available among the eligible providers.
So, to recap. If you have a mortgage on a home, you will always need homeowner’s insurance and a lender’s title insurance policy. You may be required to carry flood insurance. Depending on your loan’s characteristics, you may also be required to have private mortgage insurance. Owner’s title insurance, earthquake insurance and life insurance are up to you. If you need help or perspective on these decisions and choices, I am always available to share my experience and insight. We routinely work with many great insurance professionals because our industries are inevitably intertwined with the financing of real estate. If you would benefit from a referral, please don’t hesitate to ask.
You’re in good hands,
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