Guide to home insurance for the first-time buyer!
Your lender will require you to purchase a homeowners insurance policy before you’re able to move into your new home. While many lenders provide insurance referrals, choosing a home insurance company is your decision. You’re responsible for making sure the coverages on your policy protect your home, detached structures, and belongings.
Is home insurance required to buy a home?
You’re required to show proof of homeowners insurance to your lender before they’ll relinquish the keys to your property or even finalize and fund your home loan. Until your home is paid in full, your lender holds a lien on your property—so it’s also in their best interest to make sure the property is insured while you’re paying down your mortgage, in case the home is damaged or destroyed.
If you’re paying for your new home with cash or an unsecured line of credit (credit card or personal loan), you won’t be required to show proof of home insurance before moving. Home insurance isn’t mandated in any state, so you could conceivably go without it if you’re not financing your home. Still, even though it’s not required by law, you’ll want to consider protecting the equity in your home, not to mention the roof over your head.
How to shop for home insurance.
You’ll usually work closely with a loan specialist during the mortgage approval process and they’ll let you know when to buy home insurance. However, you can start shopping for a policy as soon as you know your new address. Shopping early can give you more to time to find the right policy and even help save money.
Your lender may provide a referral, but you’ll often save more money by bundling insurance. That means purchasing insurance from the same company for your motor vehicles and home. Bundling insurance can offer more savings or a multi-policy discount. Because you aren’t forced to buy from a particular insurer, it’s a good practice to compare pricing, coverages, and consumer reviews for a few different companies before making a final choice.
What to look for in a home insurance policy.
Check the limits on your personal property and liability coverage:
Your belongings (clothes, furniture, electronics, jewelry, etc.) are insured under Coverage C (personal property) on your policy, and you’ll want to make sure the limit is enough to cover everything you own. Keep in mind, certain valuable items may fall under a category with a “sublimit” set by your insurance company.
For example, your insurer may have a $1,500 sublimit on jewelry. That means any piece worth more than $1,500 would have to be protected by adding a rider to your policy (or “scheduling an item”).
Coverage E (liability) protects you if you’re liable for an accident on your property that injures someone. Make sure to select a liability limit that properly covers what you have in assets. Most home insurance policies max out at a $500,000 liability limit. If you need more than a half million dollars in coverage, you can purchase umbrella insurance which provides extra liability coverage for home and auto policies.
Be aware of exclusions:
Depending on your state and your insurance company, there will be a list of things your insurer won’t cover on a standard policy. Earthquakes, landslides, mudflows, and any other earth movement will be excluded on just about every policy. Flooding also won’t be covered.
If you’re at risk for a peril not covered on your policy, ask your home insurance agent or company if there’s an option to purchase protection for excluded incidents.
Understand your deductibles:
Home insurance policies will include a deductible for property damage. Your deductible is the portion of the claim you’re responsible for, so you’ll want to make sure the amount is within your budget.
When it comes to home insurance, your deductible isn’t always a set dollar amount like with car insurance. It could be a percentage of your policy’s dwelling coverage. For example, let’s say you have a wind damage claim for $7,000. If your home is insured for $150,000 and your policy’s deductible is 2%, you would be responsible for $3,000 and your insurance company would pay the remaining $4,000.
Your policy may even include a split deductible, which means you’ll have a set dollar amount for most claims, but may have a percentage apply for wind damage or other select perils.
How home insurance works with mortgage and escrow.
Most first-time buyers have their home insurance in escrow. Escrow accounts hold the funds designated for your home insurance and property taxes. Each month, you’ll pay a certain amount of money (typically, a few hundred dollars) above your normal mortgage payment. Your lender/mortgage servicer will keep the extra funds in an escrow account.
When your home insurance and property taxes are due, your mortgage servicer will pay them on your behalf from the escrow account. Lenders recommend escrow accounts to ensure you’re up to date with home insurance and property taxes. Some homeowners prefer to use escrow so they can pay for insurance and taxes in monthly installments, rather than paying the bills annually or bi-annually in one lump sum.