Do I Need Home Insurance to Get a Mortgage Loan in California?

Do I need to obtain a home insurance policy to qualify for a mortgage loan in California? And if so, what type of insurance coverage do I need?

These are common questions among first-time home buyers in the Golden State. So we have created a guide to address these and other questions relating to homeowners insurance coverage and mortgage financing.

While the state of California does not require homeowners to have a home insurance policy, most mortgage lenders do. Banks and lenders want to be sure the property is protected, since they have a financial stake in it. You’ll need dwelling coverage at a minimum, and possibly liability and personal property coverage as well.

Home Insurance Needed for a Mortgage Loan

Home insurance is not mandated by state or federal law. So, from a legal standpoint, you are not required to have a homeowners insurance policy in the state of California. But if you need to use a mortgage loan to help facilitate your purchase, you’ll probably be required to have at least a basic homeowners insurance policy.

As in most states, banks and mortgage lenders in California require borrowers to have homeowners coverage prior to closing on the home. Lenders typically want to see proof of insurance before the transaction can be finalized. We’ll talk about the kinds of proof that can be provided in just a moment.

Even if it’s not mandatory for your specific situation, home insurance is a worthwhile consideration due to the financial protection it provides.

Common Types of Coverage

When obtaining a mortgage loan, lenders typically require borrowers to have certain types of home insurance coverage to protect their investment. The specific insurance requirements can vary, depending on the lender and the location of the property. But the following types of home insurance are commonly required:

Dwelling Coverage: This is the primary component of homeowners insurance and covers the structure of the home itself. Lenders usually require a minimum amount of dwelling coverage to ensure that the home can be rebuilt or repaired in the event of a covered loss, such as fire, storm damage, or vandalism.

Liability Coverage: Liability insurance protects homeowners in case someone is injured on their property, and they are found legally responsible for the injury or damages. Lenders generally require a certain amount of liability coverage to protect against potential lawsuits. But the minimum amount of coverage needed can vary.

Personal Property: While it might not be required for mortgage approval, personal property coverage gives homeowners some important additional protection. It helps replace or repair personal belongings — like furniture, electronics and clothing — if they’re damaged or destroyed by a covered event. In this context, a “covered event” might include fire, theft, or severe weather.

Showing Proof of Insurance at Closing

As mentioned above, mortgage lenders in California typically require borrowers to provide proof of home insurance coverage, on or before the closing day. There are different types of proof, and the specific requirements can vary depending on the lender and terms of the loan. But it generally includes one of the following.

Homeowners Insurance Policy: The most common form of proof is the actual homeowners insurance policy itself. This is the comprehensive document provided by the insurance company that outlines the coverage, policy limits, deductibles, and other important details. The policy should be active and effective on the closing date or prior to it.

Declarations Page: Lenders may also request a declarations page, which is a summary or snapshot of the key information in the homeowners insurance policy. It typically includes the policy number, effective dates, coverage amounts, and the name and contact information of the insured homeowner.

Insurance Binder: In some cases, lenders may accept an insurance binder as proof of coverage. A binder is a temporary document provided by the insurance company that serves as proof of insurance until the formal policy is issued. It contains similar information to the declarations page and indicates that the insurance is in effect.

Proof of Payment: Lenders may require evidence of premium payment for the homeowners insurance policy. This can be in the form of a receipt, bank statement, or confirmation from the insurance company indicating that the premium has been paid in full.

In-Depth: The Homeowners Insurance Binder

A homeowners insurance binder is a temporary document that serves as proof of insurance coverage until a formal homeowners insurance policy is issued. It is typically provided by an insurance agent or company when a homeowner applies for a new insurance policy, or makes changes to an existing one.

The binder acts as a temporary contract between the homeowner and the insurance company, outlining the coverage, limits, deductibles, and other policy details. It provides immediate coverage while the insurance company processes the application and prepares the final policy documents.

The binder is important because it offers temporary coverage and protection against potential losses during the underwriting process, or while awaiting issuance of the actual policy. Once the formal policy is ready, the binder is replaced by the policy document, which contains all the finalized terms and conditions of the coverage.

Note: This article explains why homeowners insurance is usually required for mortgage loan approval in the state of California. This information has been provided for a general audience and might not apply to all home-buying scenarios. When applying for a loan, be sure to ask your lender what type of insurance coverage you’ll need to obtain prior to closing.