A Review of Insurance Requirements for Homebuyers and Homeowners
Insurance, in its many forms, permeates the mortgage and real estate industry. Most first-time homebuyers are only aware of hazard (better known as homeowners) insurance. But that is only the tip—and sometimes the cheapest part—of the iceberg.
All in all, the typical homebuyer will encounter some or all of the following insurance:
All them, in one way or another, help give assurances to your mortgage lender, thereby reducing (though never eliminating) the overall risk of your loan. Even your homeowner loan, for example, will pay off your mortgage lender before giving you a dime… if your property is ever destroyed.
Does that seem unfair? Actually, when you think about it, it isn’t. These insurance policies help to make mortgage loans more affordable. More importantly, you have several options available to lower the cost of these different insurance policies.
Few people realize, for example, that FHA and Fannie Mae basically function in many ways as insurers rather than lenders. They do not really lend money, as much as insure loans. With the amount of money and risks involved with real estate and mortgage financing, insurance is often the key to making homeownership more affordable for more people.
A key element with practically all insurance policies is the subrogation clause, which prevents the property owner from collecting reimbursements from both the insurer and the perpetrating party. When an insurance company pays a claim, it receives the right to sue the third party to recover any funds it has disbursed.
Most insurance policies also come with riders, sometimes called endorsements, which add, exempt or adjust the policy’s coverage.
The individual articles on the various types of insurance policies and requirements you may encounter as you buy or own a home will provide you with more details about their uses, applications and alternatives.
