Why do mortgage lenders often require homeowners insurance?

Mortgage lenders require homeowners insurance primarily to protect their financial investment in the property. When a lender provides a mortgage, they are essentially financing a significant portion of the home’s value. If the property suffers damage due to events like fire, natural disasters, or vandalism, homeowners insurance ensures that the property can be repaired or rebuilt. This coverage minimizes the risk for the lender, as their investment is secured by the value of the home.

If the property were to become uninhabitable or damaged beyond use, without insurance, the homeowner might struggle to repay the loan. This could lead to financial loss for the lender, as the collateral backing the mortgage—the home itself—would be diminished or lost. Therefore, requiring homeowners insurance is a prudent measure for lenders to mitigate risks associated with their financial exposure in relation to the property.