Why is it necessary for homes with mortgages to have hazard insurance?

Hazard insurance is crucial for homes with mortgages primarily because it ensures that the lender is designated as a loss payee. This means that in the event of damage to the property due to hazards such as fire, theft, or natural disasters, the insurance company will compensate the lender for their financial interest in the home before any remaining funds can be disbursed to the homeowner. This arrangement protects the lender's investment in the property, enabling them to recover their loss in case of severe damage.

While aspects such as lower down payments or tax deductions related to home ownership are important considerations, they are not the primary reasons for requiring hazard insurance. The essence of hazard insurance lies in the need to safeguard the lender’s collateral—the home itself—which is a significant risk that lenders manage when providing a mortgage.