What is the difference between hazard insurance and private mortgage insurance (PMI)?
This is a common question for first time home buyers and the answer – on the surface – is pretty simple. Hazard insurance protects the homeowner while PMI protects the lender. Depending on the homeowner’s financial situation and the lender’s stipulations, both may be required. It’s important to understand how each type of policy works and what is best for you.
What is hazard insurance?
Hazard insurance is a specific level of coverage within your homeowner’s policy which protects against property damage as the result of covered hazards. Your homeowner’s insurance will protect against theft or damage or injuries and may include other areas of coverage. The hazard insurance coverage is limited to the physical structure of your home and calls out specific risks which may include damage caused by:
- Fallen trees
- Fire damage
Hazard insurance is typically a minimum requirement when qualifying for a mortgage as it is the portion of a homeowner’s insurance policy that is directly tied to the physical structure.
What is Private Mortgage Insurance?
Another type of insurance that a lender may require during qualifying for a mortgage is Private Mortgage Insurance (PMI). PMI protects a lender in the case a homeowner defaults on their loan. Specific types of mortgages, such as FHA or USDA loans, make PMI policies a must. Most lenders will demand carrying PMI when putting down less than 20% on a conventional loan. In that way, PMI can help you qualify for a home loan without having to remit a large upfront down payment.
Do I need both hazard insurance and homeowner’s insurance?
As mentioned above, hazard insurance is typically the minimum amount of coverage under your homeowner’s insurance policy required by lenders. In order to qualify for a mortgage, you will need to have at least some level of hazard insurance. As it comes as a part of your holistic homeowner’s policy and not as a separate package, you will likely already be meeting that criteria by holding a homeowner’s policy. When a mortgage company calls out a requirement for “hazard insurance,” what they are typically referring to is a standard home insurance policy.
How does private mortgage insurance work?
PMI is an additional insurance policy that helps protect lenders, but it can benefit homeowners as well. Whether you are hoping to qualify for a lower down payment or your home loan specifically requires it, mortgage insurance is there to compensate lenders in the event that you can’t make payments or default.
Do you need both Hazard insurance and Private Mortgage Insurance?
Given the lender’s and your situation, Hazard Insurance and Private Mortgage Insurance both may be requirements as you qualify for a mortgage. Hazard insurance, as part of your homeowner’s policy, covers your physical property from damage. Whether you are hoping to qualify for a lower down payment or your home loan specifically requires it, PMI is the option. Together, they are part of a complete insurance strategy that can help protect your finances and your new home.
If you are looking for more details about the differences between Hazard Insurance and PMI, contact our office:
J.M. Insurance & Financial
Our agency’s mission is to recommend coverage and policies meeting each individual need.