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What Loan Officers Should Know About Homeowners Insurance
As a lender, you will say it a lot: Homeowners are required to purchase homeowners insurance to protect themselves and the lender from losses should the home be damaged. But did you know it can affect a client’s mortgage and other aspects of their homeownership?
It Can Affect A Client’s Monthly Mortgage Payments
When clients purchase a home, they know that they will have to pay monthly mortgage payments. However, that payment can be affected by homeowners insurance. When in the process of buying the home, lenders will give homeowners an estimate on how much their homeowners insurance will cost them based on their zip code and other similar homes in the area.
It is important to emphasize to clients that this is an estimate—the actual cost and how the insurance will affect their monthly payment will depend on their policy and if they bundled with other insurances. As such, it is critical that you advise clients to set a budget and shop around for a policy that is right for their needs.
Hazard Coverage May Be Required
If the client’s home is in a hazardous area like a flood zone, they may be required to purchase additional hazard coverage with their homeowners insurance. This will help protect them and you should flooding or other disaster occur.
There Are Different Levels Of Homeowners Insurance
When a client purchases homeowners insurance, there are different levels of insurance:
- Actual cash value: Clients will be reimbursed for the estimated value of their losses.
- Replacement cost: The costs clients have to pay when an asset is replaced with a similar one at the current market value.
- Guaranteed cost: The client’s home will be returned to the state it was in before it was damaged.
It Also Provides Client Protection From Liability
Homeowners insurance is not only helpful in protecting a client’s home. It also helps protect them from liability if someone gets hurt on their property. So if they are sued, a client’s property and savings are protected from being seized by the court and they have some money to defend themselves with.
Clients May Also Have To Purchase Private Mortgage Insurance
In some cases, homeowners insurance is not enough. If a client’s down payment was less than 20%, they may be required to also have private mortgage insurance (PMI). Like homeowner’s insurance, this helps protect lenders in case the client defaults on their loan, and can be factored into their monthly mortgage payments.