Buying a Texas property, whether for personal use or as an investment, is a complicated process. There are many steps to go through as well as countless topics most of us haven’t dealt with before. From loan terms, title insurance, to all the required inspections and insurance – it can get pretty complicated. One of the least understood lending requirements is hazard insurance.
A lien holder, or lender, requires that a property have insurance to protect their investment. Some people use the term hazard insurance and others call it homeowners insurance. It can be confusing to see them used interchangeably. But there are some basic differences between the two terms that you need to know before you start in Texas real estate.
What Does Hazard Insurance Cover?
The goal of hazard insurance is to protect the property in the event of damage from nature or other forces. It is designed to make sure that the lender’s investment is protected at all times. In 2017, 6% of all insured homes had to make a claim according to a study done by ISO. And of that total, 98.1 percent of those claims were for property damage to the home.
The following are some of the coverage areas that your hazard insurance covers include:
- Fire & smoke damage
- Hail damage
- Storm damage
- Windstorms (usually including hurricanes and tornadoes)
- Falling objects, like a tree branch
- Freezing household systems, like plumbing, heating, and air conditioning
- Damage due to ice, snow, and sleet
- Riot damage
- Other acts of nature
If there was a fire and the home and an attached garage on the property burned down, this insurance would cover the costs to rebuild the structures. So Texas hazard insurance covers a lender’s exposure and protects the structures only. It is mandatory by all lenders if you are looking to get a mortgage from them.
It’s also designed to protect you, the property owner from liability. This type of liability can come in the form of someone hurting themselves while on the property. It can also be unsafe conditions such as a sidewalk that causes someone to trip. Or, there might be conditions inside the house that are hazardous.
Hazard insurance covers the property under several negative scenarios that might occur. The insurance company calculates the cost, called a premium, based on replacing the structure in the event of damage or if it’s destroyed. That then becomes the annual hazard insurance premium that you need to pay. Some lenders can include hazard insurance & homeowner’s insurance in your monthly mortgage payment. You need to ask them if that’s the case.
What Does Homeowner’s Insurance Cover?
For most insurance policies, hazard insurance is one piece of what makes up a homeowner’s policy. Your lender might only speak about hazard insurance, since that’s what protects them. When you talk to your insurance agent, they will be talking about a homeowner’s insurance policy.
A homeowner’s insurance policy includes the hazard insurance protection within the homeowner’s policy. And it includes a lot more. In addition, it also will include personal property and other structures.
Your homeowner’s insurance will usually cover structures other than the actual home. The insurance will help pay to repair or replace items such as fences, sheds or detached garages after a covered loss.
Personal property insurance is one of the most important parts of your homeowner’s insurance policy. This coverage will protect you and your belongings in the event of loss or damage. Whether it is a computer, bureaus, clothing or antiques, the coverage of personal property is important. Your insurance company will offer a few different options to consider in terms of coverage. Some policies offer what’s called “replacement cost” coverage and others offer a set dollar amount of coverage, no matter what the value of the belongings. Understanding the difference and what protection you have is critical.
Hazard insurance is going to be required by any lender that offers you a mortgage. What you choose for coverage as well as how extensive your homeowners policy coverage is will be up to you. Also, for any property, it is critical that you understand what is being covered, what’s not and what potential liability you have. Then choose the hazard insurance and homeowners insurance policy that fits you and your needs best.
To learn more about hazard insurance as well as financing options for your next project, Contact Loan Ranger Capital today!