Whether you finance your property through a bank or a private lender, you’ll need to have insurance coverage in force when you close on your deal.

Of course, any property needs to have insurance regardless of any lien but when a mortgage is placed on the property there are a few requirements investing in real estate required insurance coveragelenders will have, creating a minimum coverage policy. What will you expect to see in a typical homeowner’s insurance policy for a rental home?

The coverage can vary based upon your own preferences but lenders do require a minimum coverage amount of either the loan balance or replacement cost. The property is their collateral and should disaster strike, the lender will at least get their money back as the lender is listed as the primary payee.  Lenders determine the replacement cost by reviewing a section in the appraisal report that breaks down how much it would cost to replace the structure should the home be destroyed.

On the insurance policy, the payee will have the lender’s legal name along with an assignment clause. The assignment clause allows the policy to be in force should the lender sell or transfer the mortgage in the secondary market. The mortgagee clause will read something to the effect of “ABC Mortgage Company, ISAOIA” which stands for “its successors and or its assigns.”

Insurance will cover hazards along with repair or replacement of permanent fixtures and appliances in addition to other riders for personal property and a full year’s policy must be in force at the time of closing. The cost of the premium will vary based upon the carrier’s rates, the amount and property insured and the deductible. The higher the deductible, the lower the premium.

Finally, insurance for rental property will typically have a lender-required addendum called rent-loss coverage. Rent loss coverage is a policy that provides funds to make the mortgage should the property be uninhabitable in case of a claim. The coverage is not available to make the mortgage payments simply due to a vacant apartment. Not all insurance carriers carry rent loss so make sure you do your homework ahead of time finding an agent that can issue the policy.