What typically triggers a lender to require a borrower to have homeowners insurance?

Homeowners insurance is typically required by lenders primarily to protect their financial interest in the property. When a borrower secures a mortgage, the lender finances a significant portion of the property’s purchase price. Therefore, the lender wants assurance that the property is protected against risks such as fire, theft, and natural disasters. In the event of damage or loss, homeowners insurance provides the necessary coverage to cover the repair or replacement costs, thereby ensuring that the lender’s investment is safeguarded.

While other factors, such as a borrower’s credit score, may influence lending terms, they do not directly trigger the requirement for homeowners insurance. Also, it is not the case that all properties require it regardless of the loan type; certain loan types and specific properties may have different requirements. Investment properties do indeed require insurance, but the lender’s interest in protecting their collateral is the overarching reason for requiring homeowners insurance in general lending practices.