As you probably know, most mortgage companies require you to utilize a homeowners insurance policy to protect the property. And, of course, you probably wouldn’t want to go without homeowners insurance anyway!
But occasionally, it is possible to qualify for a mortgage, but not a homeowners insurance policy. Often this has to do with the area of the home, such as when it’s located in a high-risk area (wildfires or other disasters are common). At other times the denial might be due to your claims history, something that is unlikely to come up in the mortgage process. Certain other factors might also make it difficult for you to maintain homeowners insurance.
So, what are you to do? You’re required by the mortgage company to carry homeowners insurance, and you don’t want to default on your contract. Not to mention, you realize that neglecting to insure such a large investment would be unwise, anyway.
Residual insurance is designed to address these situations. These are typically state-run programs, in which insurance companies are required to participate, that equitably spread the risks and rewards of the insurance market. The residual insurance program might also strictly limit the scope of coverage, and allows for higher, risk-based rates.
The fact that some people, who otherwise wouldn’t qualify for a policy, can obtain homeowners insurance is definitely a good thing. But of course, these higher-risk policies do charger higher premiums and often impose higher deductibles than mainstream policies. Maximum coverage amounts might also be lower, which could leave some homeowners lacking coverage for some amount of the home and/or possessions.
If you do need to enroll in a residual insurance policy, it would be a good idea to consider how you would meet your deductible in the event of a total loss, and establish some form of cash savings or accessible funds for that purpose.
If you’ve been approved for a mortgage but are worried about your ability to access homeowners insurance, give us a call. We can help you assess your options, and decide if residual insurance or some other path would work for you.