Chris Bakes
New homeowners are not legally obligated to insure their homes by the state of Illinois. However, mortgage lenders themselves almost always require home insurance policies before issuing a mortgage. In the rare instances when they do not mandate insurance, lenders may offer subpar rates and other restrictive measures to new homeowners who do not have robust insurance protection.
This article reviews the typical insurance documents required by mortgage lenders in Illinois before they will validate a home loan. Homeowners can use this information to secure the policies they need to get their loan approved with less hassle.
Why Do Mortgage Lenders Require Homeowners Insurance?
When mortgage lenders issue a loan, they weigh their financial security against the reliability of the borrower’s finances. To offer competitive rates, lenders often need a way to protect their investment. Insurance policies can provide that assurance, which is why most lenders require one before approving a loan, though Illinois state laws do not.
In addition to reducing the lender’s financial risk, insurance helps both lenders and homeowners defer the costs of unexpected disasters to a third party (in this case, the insurance company). In the event of a natural disaster, theft, fire, or other covered event, the financial costs can be mitigated.
The value of these protections changes based on the risk factors of each borrower and property. Homebuyers with lower credit scores, for example, may benefit from increased insurance protection to lower their lender’s risk assessment. Additionally, homes located in areas that are at high risk for damage from floods, earthquakes, or storms may need extra protection that is not included in traditional home insurance policies.
Note: In Illinois, the cost of an average home insurance policy jumped 50% from 2022-2025, the second-highest jump of any state in the country during that time. This makes smart home insurance investments even more important for getting the most returns from rising premium costs.
Types of Homeowners Insurance Requested by Mortgage Lenders
When mortgage lenders evaluate potential buyers, they look for policies that effectively lower their risk. The following policy types are not an exhaustive list of the possibilities, but these options can provide new homeowners with the best chance of meeting their mortgage lender’s requirements:
Dwelling Coverage
Dwelling coverage protects the home from the main causes of disaster-related damage, including structural damage, fire damage, storm damage, and vandalism damage. Most lenders require dwelling coverage as the minimum basis for home insurance policies since structural protection covers the bulk of their risk.
Example: The home becomes damaged in a storm and becomes uninhabitable, requiring repairs and extra living expenses to return to normal. Dwelling coverage helps homeowners recover by mitigating these costs, potentially preventing them from defaulting on their mortgage during the recovery process.
Personal Property Coverage
Personal property coverage is not usually required by mortgage lenders since damage or loss to personal property does not impact their lending agreement. However, minimum personal property coverage is often included in dwelling coverage, so many new homeowners have this protection without knowing it. Even if the event that caused the damage is covered by a policy provision, such as storm damage protection, personal belongings cannot be repaired or replaced without additional protection.
However, the value of personal property coverage depends partly on whether it provides actual cash value (ACV) or replacement cost value (RCV) coverage. Basic policies may only provide actual cash value protection, which means the value the insurance company reimburses the homeowner would factor in the age and condition of the item. By upgrading to replacement cost coverage, homeowners can be reimbursed for the full cost of replacing the damaged or stolen item at current prices.
Tip: Most homeowners have basic personal property coverage, but many would benefit from expanding their coverage to RCV policies, adding another layer of protection in the event of a disaster.
Additional Disaster Coverage
Other than dwelling coverage, disaster coverage is the insurance most likely to be required by mortgage lenders. However, the type of policies they will require depends on the age of the home, its location, and regional statistics for weather-related property damage. In Illinois, these policy requirements often focus on flood coverage.
According to the Illinois Association for Floodplain and Stormwater Management, even homes in low or moderate risk flood zones are more than 500% more likely to experience a flood than a house fire. To protect against constantly shifting storm risks and the dangers they pose to their investment, mortgage preparers often require or highly recommend additional flood coverage for new homeowners.
Note: Illinois state laws do not require flood insurance policies, but mortgage lenders reserve the right to deny loans or change their terms based on the risk level in the homeowner’s area.
Required Documentation for Homeowners Insurance Applications
When approving a new homeowners insurance policy, providers verify applicant information, including:
- Personal information, contact information, marital status, home business status (if applicable)
- Insurance history, including prior claims
- Inspection reports on the current home, including the layout, roof age, wiring, plumbing condition, and more
- Proof of safety devices such as fire or burglar alarms, sprinklers, security cameras, smart appliances, and on-site fire hydrants
They may request further documentation depending on the condition of the home, its location, and the buyer’s financial risk level. Assembling the required documents can be daunting, especially for first-time homebuyers, which is why a local financial advisory team is invaluable for securing good home insurance policies without unnecessary stress.
Protect Your Investment With Trusted Financial Advice
At Pro Insurance Group, our local team of agents provides homeowners with the information they need to make informed decisions about acquiring or updating a homeowners insurance policy. Our goal is to help homeowners recognize their lender’s requirements and get the protection they need to minimize their risk assessments and maximize their coverage.
Contact our team and schedule a consultation to learn about home insurance requirements in Illinois and how to send a successful mortgage application in your area.
