Can lenders require borrowers to obtain homeowners insurance?

Lenders are allowed to require borrowers to obtain homeowners insurance as a means of protecting the property that serves as collateral for the loan. This practice is standard in the mortgage lending industry because homeowners insurance provides financial protection against damage to the property, which safeguards the lender’s investment. Should the property be damaged or destroyed, homeowners insurance ensures that there are funds available to repair or replace it, ultimately preserving the value of the collateral.

In addition, requiring homeowners insurance aligns with prudent lending practices, as it mitigates the risk associated with lending. This requirement is not restricted to certain types of mortgages (like variable-rate mortgages) or property types (like commercial properties); rather, it is a common stipulation for residential loans overall. It is important for borrowers to understand that their lender's requirement for this insurance is deeply rooted in risk management and financial responsibility.