What Is Hazard Insurance

Hazard insurance (also sometimes called homeowner’s or property insurance) protects you (and the lender who is using your property as security for a loan) in case of physical damage to your real estate, usually including damage from natural causes such as fire, earthquake, etc. It is not the same as mortgage insurance, which protects the lender if you default on your mortgage, nor is it the same as title insurance, which protects both you and the lender if it turns out that the seller of your property did not legally have the right to sell it to you. (Hazard insurance also usually includes coverage of your personal property in addition to your home, and may also include coverage for liability for accidents that occur in your home, but for mortgage purposes, the essential component is the coverage of damage to the real estate used to secure your loan.)

Quick Summary: Hazard insurance covers you and the lender against physical damage to your home.

Who Needs To Get Hazard Insurance

Under current mortgage underwriting guidelines, almost all homeowners who have mortgages are required to keep adequate insurance coverage on their home: if you are purchasing a new home, you will need to obtain a new hazard insurance on the property, and if you are refinancing your loan on a home you already own, you will need to make sure that your existing hazard insurance is up to date and that your insurer has the correct info for your new loan.

(For refinancers, you can also use this opportunity to make sure that your coverage is sufficient for the current value of your property, and if you are interested also shop your policy around to other vendors to see if you can qualify for a better rate. Note that if you do obtain a new policy from a new vendor, you can usually cancel your existing policy and obtain a prorated refund of any premiums paid for that existing policy.)

Quick Summary: Everyone getting a mortgage needs to get hazard insurance or show proof of their existing hazard insurance.

When To Get Hazard Insurance

In general, the sooner that we can send the appropriate documentation (see below) for your hazard insurance to the underwriter for your loan, the better. In general, however, we prefer to send that documentation to the underwriter at least 2 weeks before your scheduled settlement.

(Note that if you are refinancing a loan on an existing property, you can usually keep your current policy (assuming it meets the guidelines below), but we still need to verify your information sooner rather than later.)

Quick Summary: Get your policy (or send us the information on your existing policy) ASAP, and no later than 2 weeks before settlement.

Where To Get Hazard Insurance

You can obtain your hazard insurance from any licensed insurance agent.

When you’re shopping for insurance, however, you may want to avoid using a vendor that contracts out their homeowner’s insurance to another company; for example, GEICO specializes in auto insurance and also offers homeowner’s insurance, but their homeowner’s insurance is actually rebranded insurance from 3 other providers. (The problem w/ using rebranded insurance is that you often don’t know which provider you’ll end up with, and some of the providers that sell via rebranding in that manner are ones that contractors prefer not to deal with. Some of our clients have run into problems in the past where they needed to make claims on those sorts of hazard policies, and were told by the people doing the repairs that they had had so many bad experiences with those particular providers that the homeowners would need to pay for the work up front and then apply for reimbursement from the insurance co. afterward, rather than going through the usual process of having the contractor get the work pre-approved by the insurer and then having the insurer pay the contractor directly.)

If you already have an insurance agent that you are happy with, we recommend talking to them first (with the caveat above that if that insurance agent contracts out their homeowner’s insurance, you may run into issues with the reimbursement process when making a claim).

If you don’t already have an insurance agent, but are eligible to obtain insurance through USAA (generally reserved for members of the military and their families), you may want to contact them, as they tend to have very competitive rates as well as good customer service.

Finally, if you need a recommendation to an insurance agent, here is the contact information for the agent(s) that we currently use and tend to recommend to homeowners:

• Michael Biron
  Liberty Mutual Insurance
  (703) 385-4444 x50872
  Michael.Biron@LibertyMutual.com

• Max Olson
  Nationwide Insurance
  (703) 635-4248
  OLSONM13@nationwide.com

• Marisa Alonso
  Allstate Insurance
  301-431-1501
  marisayalonso@allstate.com

If you contact any of the above agents, please be sure to tell them that you’re working with us; among other things, we may have been able to negotiate an extra discount on rates for our clients, so mentioning us can potentially save you on your costs.

Quick Summary: You can get your policy from any licensed insurance agent. We recommend against rebranded insurance, and suggest using your current agent, USAA, or the agent(s) listed above.

What Hazard Insurance To Get

The requirements for the type of hazard insurance that you must obtain are different depending on whether or not you are purchasing a property in a condo development, so please make sure to look at the instructions below for the correct type of property. In addition to those property-type-specific requirements, there are other requirements that depend on if you are refinancing or purchasing a new property.

For purchases, make sure that the policy that you obtain:

1. Will cover one full year;

2. Has a start date that is the same as your scheduled settlement date; and

3. Will be paid via escrow by your lender.

For refinances, make sure that your current policy (or a new policy if you obtain one):

1. Will not expire for at least 2 months after settlement; and

2. Will be paid via escrow by your lender.

If you are obtaining a new policy (for either a refinance or a purchase) insurance companies require you to pay for the full year’s policy at the time that you set it up, but some will occasionally let you make that full year’s payment as part of settlement instead, which has two potential advantages to you:

1. It’s one less payment to keep track of since you can just roll it into your “cash-to-close” payment at settlement; and

2. If you have a credit towards closing costs from the seller that you may not otherwise be able to use in its entirety, you can often use part of that credit towards your hazard insurance if that insurance is being paid for at settlement.

If your insurer does agree to let you pay for your insurance at settlement, please let us know about that as soon as possible.

• Coverage Requirements For Properties In Condominium Developments

  Ask your insurance agent for an “HO-6″ policy with “walls-in” coverage, and where the “building coverage” is at least 20% of the sales price of the property (for purchases) or of the loan amount (for refinances). Some insurance agents feel that this level of coverage is excessive for condominium properties; however, due to regulations, all lenders are now required to have borrowers obtain this level of coverage before issuing a mortgage.

• Coverage Requirements For Non-Condo Properties

  For all other property types, lenders will usually defer to the judgment of your insurance agent as to the appropriate amount and type of coverage required.

Quick Summary: There’s no quick summary here; go over the coverage requirements above with your insurer in detail.

What Documentation To Send To Us

The specific document that we will need from your insurer after you have paid for your policy (or arranged for payment to be made as part of settlement) is the “declaration page” (aka “dec page”) for the policy. However, that page needs to have specific language inserted into it that varies depending on the wholesale lender who is funding your loan; thus, we will need to coordinate with your insurance agent to obtain that dec page with the correct language on it.

Once you have arranged for payment, then, the best way to move forward is to send us the name and contact information for your insurance agent, as well as your policy number; we can then contact them directly to obtain the dec page.

Many insurers may send you a receipt or invoice showing your coverage levels and policy number as well as the contact information for your insurance agent; if you receive such an invoice, feel free to just send us a copy of that document (via fax or secure upload as with any other documents that you submit).

Some insurers have national hotlines rather than individual insurance agents that you deal with; in that case, ask the person that you are dealing with on the hotline for the phone number that your lender should call to obtain the dec page for your policy.

Quick Summary: We need to coordinate with your insurer to get the final document that we need, so just send us their contact info and your policy number after you have arranged for payment.

Possibly related posts (automatically generated):

1. Is Mortgage Protection Insurance a good deal?
2. Frequently Asked Questions about Title Insurance
3. Flood Insurance Unavailable Due To Congressional Error

There are three main reasons that Mortgage Protection Insurance (MPI) doesn’t make sense for most homeowners:

1. MPI policies are usually pretty expensive–usually, in fact, they are more expensive than the same amount of coverage under a “regular” life insurance or disability insurance policy.
2. Under most MPI policies, if a covered homeowner dies, all the insurance policy will do is pay off the homeowner’s mortgage–and that means that with every passing year, as the homeowner pays their mortgage balance down, the coverage that they are getting effectively decreases, while their premiums stay at the same high level; under a regular life insurance policy, on the other hand, in the tragic event that a homeowner does die, their heirs would get the full amount of the coverage and would be able to keep and use any money left over after paying off the mortgage.
3. For most homeowners, death or disability is (thankfully) a pretty rare occurance; a far more common risk for most homeowners is that they might lose their job and thus be unable to pay their mortgage–and that is a risk that most MPI policies do not cover at all.

So an MPI policy will usually cost a homeowner more than a regular insurance policy, while giving them less coverage and not addressing the most common risk that might affect a homeowner’s ability to pay their mortgage.

For these reasons, I usually advise most homeowners who are concerned about possible events that might leave them unable to pay their mortgage to skip the MPI policies. Instead, they should make sure that their life and disability insurance coverage is sufficient to cover their mortgage in addition to any other expenses they might have in such a situation; to be really safe, they can take the difference between the money they would spend on a pricey MPI program and the lower premiums for a regular insurance policy, and set up an emergency savings fund to cover their expenses in case of a short-term job loss.

Disclaimer: Always consult a licensed professional about insurance questions.

If you’ve got questions about your current insurance coverage, we’d be happy to give you a referral to a trusted insurance agent who can help you to evaluate your current situation and make sure that the coverage that you have is appropriate to your needs.

Possibly related posts (automatically generated):

1. Frequently Asked Questions about Title Insurance
2. Obtaining Hazard Insurance On Your Property
3. HUD Increases FHA Mortgage Insurance Premiums