Why Do Mortgage Lenders Often Require Home Insurance?

Homes can be very expensive, and most families simply don’t have enough cash to buy a house outright. Fortunately, you can take out a mortgage from a bank or another lender. Then, you can buy a property and make monthly mortgage payments. One thing some folks are surprised to learn with mortgages is that the lender(s) will often require that the home be covered by home insurance. We’ll dig into why, but if you’re looking for home insurance and an agency that serves Cloquet, MN, get in touch with Brittany Olson Insurance Agency LLC.

Why Home Insurance is a Must

Risk is probably the biggest consideration for most lenders. This is why folks with high credit scores often enjoy lower interest rates. The lenders know that these individuals are likely to repay all their loans. Unfortunately, someone with bad credit may be less likely to pay back a loan, so the lender will want to charge higher interest rates because the risks are higher.

Another way to lower risks is to use collateral. This is how mortgages typically work. Banks will have a lot of money on the line, but because the property being bought can be used as collateral, they can often charge lower interest rates even if someone’s credit score is not ideal. Should the home buyer fail to make their mortgage payments, the bank will be able to take control of the property and can then sell it to raise the funds needed to cover the loan, or at least a large part of it.

Consult With Us

From the lender’s point of view, the more valuable the property, the better. However, if a home is destroyed, say in a fire, the property will be worth much less. For the lender, this leads to increased risks. For this reason, lenders often require home insurance because that insurance provides them with protection too. If you need home insurance, contact Brittany Olson Insurance Agency LLC. We serve Cloquet, MN and other communities.