Financial institutions and other lenders take a risk when issuing funds to home buyers or for other property purchases. Not only are there concerns that the borrower will default on the loan, but there are other perils that could jeopardize the lender’s interest in the property. In an effort to guard against these losses, the lending institution will take out specific insurance and require that the property owner also secure insurance coverage.
Special Insurance Coverage
A homeowner is generally required to take out an insurance policy that covers the perils of fire, destruction and potential flood damage. However, the lender will use mortgage impairment insurance to address the loss against mortgage interest in the event that the insurance taken out against the perils is not enough or does not cover the peril. Lenders aren’t always able to recoup their costs for the mortgage certain incidents occur.
For example, consider the problems if a mortgaged property caught fire. If the property owner had an outstanding mortgage on the home but the paperwork on the homeowner’s policy didn’t list the lender as the mortgagee, the claim wouldn’t be paid out. This would be a loss on the mortgage interest since the collateral on the loan has been destroyed.
A mortgage impairment policy is needed when considering the likelihood of errors and omissions with the paperwork process. It is also a good investment given the demands on lenders.