Homeowners Insurance (HOI) Deep Dive
Everything you need to know about Homeowners Insurance
HOI stands for Homeowners Insurance and is required for all borrowers getting a mortgage. Homeowners insurance policies are required in case anything (fire, tornado. etc) happens to your home so that you and the lender can recoup the value shared in your home. This protects your equity and also allows you to pay off any outstanding mortgage on your home in the event that it is destroyed or damaged.
Action Items: Learn the basics of Homeowners Insurance.
Why do we need
Mortgage lending belongs to a broader lending group known as secured lending / asset-backed lending which means that the lender “secures” the value of the loan they offer by tying the physical property and home value to the loan itself.
Lenders require you to have an active HOI policy for all purchase transactions, in order to close on and finalize a mortgage loan. The lender is willing to lend such a large amount of money because the value of the loan is supported by and tied to the property value, which is why they want to ensure the value of the property from potential damages. For example, in the terrible event that your home is damaged or destroyed, the mortgage will still be outstanding and HOI will allow you to pay off the mortgage through the insurance claims.
What to do
You are allowed to shop for the HOI policy of your choice during the mortgage process and most borrowers commonly do so based upon the price/cost of the policy and the coverage the provider offers. There are baseline insurance coverage requirements outlined by the Government-sponsored enterprise FNMA that need to be in place in order for a lender to close upon an Agency conventional loan. These parameters may change by the loan program, but most HOI providers are well-versed in these requirements. Once you choose and finalize your policy with the HOI Provider, the next step is to structure your HOI policy to include the lender (Loss Payee) on the policy, so that the lender recoups damages as the first lien holder prior to any payments that will go to you. This process requires some communication between the 3rd party provider and originator (that’s us, Morty) to make sure all details are correct and finalized to go into effect upon closing on the mortgage and purchase transaction.
What we need
We will need a finalized homeowners insurance policy, typically in the form of a Declaration Policy. We will ask you for the Declarations Page or Evidence of Insurance, which your insurance agent will provide to you after you have finalized your policy.
You can finalize your policy without paying for it before closing. HOI can be paid upfront or escrowed. Most borrowers choose to escrow their first year of homeowners insurance, but it’s up to you.
You can learn more about selecting an HOI provider here and the type of policy you will need to obtain, based on your property.