Hazard insurance on a mortgage: what FHA, VA and conventional loans require
Hazard is the word on the loan documents; homeowners is the word on the policy. Here is what each loan type actually requires, and the five things underwriting checks before it clears the file.
The short answer
Hazard insurance is the lender's term for the dwelling coverage in a homeowners policy: the part that pays to repair or rebuild the house after fire, wind, hail and similar perils. Every mortgage requires it, because the house is the lender's collateral. It is not a separate product, and it is not mortgage insurance.
For conventional loans sold to Fannie Mae, the policy must cover the home on a replacement cost basis, with an exception for roofs, and no deductible for a required peril may exceed 5% of the coverage amount. VA rules require coverage customary in the area, and flood insurance in special flood hazard zones.
FHA lenders require hazard coverage too, normally collected through escrow, and spell out the amount and the clause in their conditions. Whatever the loan type, underwriting checks the same five things: names, clause, coverage amount, deductible and effective date.
Fannie Mae — Selling Guide B7-3-02
eCFR — 38 CFR 36.4329
CFPB — 12 CFR 1024.37
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What is hazard insurance on a mortgage?
Hazard insurance is the coverage on the structure of the home, the part a homeowners policy calls Coverage A or dwelling. Lenders call it hazard insurance because it protects against named hazards like fire, lightning, wind and hail. The buyer meets the requirement by buying an ordinary homeowners policy that meets the lender's terms.
Hazard, homeowners and mortgage insurance compared
| Term | What it is | Who it protects |
|---|---|---|
| Hazard insurance | The dwelling coverage inside a homeowners policy | The house, and the lender's collateral |
| Homeowners insurance | The whole policy: dwelling, belongings, liability, living expenses | The owner, and the lender through the clause |
| Mortgage insurance (PMI or MIP) | Insurance on the loan itself | Only the lender, if the borrower defaults |
The last row is the one buyers confuse most often. Mortgage insurance and homeowners insurance are different policies with different jobs.
What do conventional loans require?
For loans sold to Fannie Mae, the property must be insured on a replacement cost basis with an exception for roofs, against fire, wind, hail and the other required perils. The deductible for each required peril cannot exceed 5% of the coverage amount. Lenders selling to other investors often use the same or similar standards.
Replacement cost, and the roof exception
Replacement cost means the policy pays to rebuild with materials of like kind and quality, without subtracting depreciation. The roof exception exists because many carriers now settle older roofs at actual cash value. When a roof is old, check how the policy settles it before assuming the lender will accept it.
The 5% deductible cap
It applies to each required peril separately. A policy with a standard deductible and a separate wildfire or wind deductible has to keep each one at or below 5% of the coverage amount. On a $400,000 dwelling limit, that ceiling is $20,000.
Why this matters more in Eastern Washington
Wildfire exposure is where separate, percentage-based deductibles appear. A buyer who picks the cheapest quote in a fire-prone area can end up with a wildfire deductible that does not meet the cap. Comparing carriers on the deductible, not just the premium, avoids a late condition.
What do VA loans require?
VA rules require hazard insurance in an amount sufficient to protect the property against the risks it faces, to the extent customary in the locality. Insurance proceeds go to restoring the property or to the loan balance, and flood insurance is required whenever the property is in a FEMA special flood hazard area.
What do FHA lenders ask for?
FHA loans also require the home to be insured against hazards, and the premium is normally collected through the escrow account. The exact requirement — coverage amount, deductible and the mortgagee clause — arrives in the lender's conditions, so those conditions are the document to work from, not a general rule found online.
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What happens if hazard insurance lapses?
The servicer starts a federal notice process. It must send written notice at least 45 days before charging the borrower, then a reminder at least 15 days before the charge. If no proof of coverage arrives, it buys force-placed insurance that protects the loan and bills it to the borrower, usually at a higher price.
Why force-placed coverage is a bad deal for the owner
It is designed to protect the lender's collateral. It typically does not cover the owner's belongings or liability, and it is priced without shopping. A lapse that starts as a forgotten renewal can become a much more expensive policy with less in it.
The pre-closing checklist underwriting uses
Whatever the loan type, the same five items decide whether a policy clears. Checking them before the binder goes out is faster than fixing them after a condition comes back, and it is the step that most often moves a closing date when it is skipped.
| Item | What underwriting checks |
|---|---|
| Named insured | Every person on title is named on the policy |
| Mortgagee clause | Lender name, successors and assigns, mailing address, loan number |
| Coverage amount | Replacement cost of the dwelling, not the purchase price |
| Deductible | Within the lender's cap for every required peril |
| Effective date | On or before the closing date, with the first year paid or escrowed |
How we handle it on a file
Send the request 30 to 40 days before closing with the conditions attached. We quote six carriers, send the replacement cost estimate if underwriting asks for it, and re-shop the same day if the premium breaks the DTI. The details are on our page for realtors and loan officers.
Related reading
How to write the mortgagee clause · loan officer marketing to realtors · how escrow pays the premium · home insurance in Washington.
Frequently asked questions
Is hazard insurance the same as homeowners insurance?
Hazard insurance is the lender's name for the part of a homeowners policy that covers the structure against perils like fire and wind. A homeowners policy includes it, plus liability, belongings and living expenses. Buyers buy one policy, not two.
Does hazard insurance cover flooding?
No. Flood is excluded from standard homeowners policies and is bought separately. Lenders require it when the property is in a FEMA special flood hazard area, and VA rules require it in those areas for the life of the loan.
Can a lender reject a deductible that is too high?
Yes. For loans sold to Fannie Mae, the deductible for each required peril cannot exceed 5% of the coverage amount. A separate wildfire or wind deductible above that limit is a common reason a policy gets sent back.
Who chooses the hazard insurance company, the borrower or the lender?
The borrower. The lender sets the requirements — coverage amount, deductible, mortgagee clause — but the borrower picks the carrier and can change it later, as long as the new policy meets the same requirements.
What is force-placed hazard insurance?
A policy a mortgage servicer buys when it has no evidence the borrower is insured. It protects the loan, not the owner's belongings, and is billed to the borrower after required written notices.
Keep reading
Sources
- Fannie Mae Selling Guide — B7-3-02, Property Insurance Requirements for One- to Four-Unit Properties — replacement cost and the 5% deductible cap.
- Fannie Mae Selling Guide — B7-3-08, Mortgagee Clause, Named Insured, and Notice of Cancellation.
- Code of Federal Regulations — 38 CFR 36.4329, Hazard insurance — the VA requirement.
- Consumer Financial Protection Bureau — 12 CFR 1024.37, Force-placed insurance.
This article is general information about insurance in the state of Washington. It is not legal advice and it is not an offer of coverage. Whether a policy covers a given loss depends on its own wording, its endorsements and its exclusions; read yours, or send it to us and we will read it with you. Anel Galicia is a licensed insurance producer in the state of Washington.