Home Insurance: Pre-Closing Sign-Up

If you're buying a house, you'll likely need to take out home insurance before the sale closes. This is because your mortgage lender will require you to have a policy in place to protect their investment. Even if you're not taking out a loan, it's still recommended that you insure your property against unexpected damage. You should start shopping around for home insurance as soon as you sign a contract to buy a new home, giving yourself at least a month to compare quotes and find the best policy.

Home insurance is mandatory if you're taking out a loan

Home insurance is not a legal requirement, but if you're taking out a loan to buy a home, your lender will likely require you to have a policy in place before they release the funds. This is because lenders have a legal interest in the home as it serves as collateral for the loan.

Lenders want to ensure they can recoup their investment if the homeowner defaults on the loan. So, they mandate home insurance to protect their financial interests in case the home is destroyed or damaged. Most lenders will request proof of insurance a few days to a couple of weeks before the closing date.

Additionally, while not a legal mandate, home insurance is also essential to protect your investment. Without insurance, you risk losing a substantial amount of money if something happens to your home shortly after purchase.

Types of Home Insurance

There are two main types of home insurance relevant to this context:

• Home/Property Insurance: This type of insurance is designed to protect the property and its contents against natural disasters, theft, and other events that cause property damage. It is usually a requirement for obtaining a housing loan as it safeguards the lender's investment in the property.
• Home Loan Insurance: Also known as mortgage insurance or a home loan protection plan, this type of insurance covers the borrower's outstanding loan liability in the event of unforeseen circumstances such as death, disability, job loss, or damage to the house. This type of insurance is not mandatory but is often strongly recommended by lenders as it protects both their investment and the borrower's family in case of financial hardship.

What to Do if Your Lender Insists on Home Insurance

If your lender insists on home insurance as a condition of the loan, you have several options:

• Communicate: Inform your lender that you know home insurance is not mandatory for securing a home loan.
• Request a Written Document: Ask the lender to provide a written statement indicating that home insurance is mandatory to obtain the loan.
• Escalate the Matter: If the lender remains adamant, reach out to their senior management or higher officials to discuss the issue.
• File a Complaint: If all else fails, you can raise a complaint with the Banking Ombudsman by following the proper procedure.

Remember that it is your right to make informed choices about insurance products, and you should not feel pressured to accept the first option presented to you. Shop around, compare different policies, and choose the one that best suits your needs and circumstances.

Lenders require insurance to protect their investment

Lenders mandate insurance to ensure the property can be rebuilt or repaired if it is destroyed or damaged by a covered peril. They will require proof of insurance before closing on a mortgage. This is usually required at least three days before the closing date, but it's a good idea to start shopping around for insurance about a month before closing. This gives you time to compare different insurers and make sure you're getting the best deal.

The amount of insurance required by lenders is based on the replacement cost of the home, which is the cost to rebuild it from the ground up. This is different from the home's market value or purchase price. Lenders will also require that they are named as a loss payee on the policy, meaning that if a claim is filed, the check from the insurance company is made out to both the lender and the homeowner.

In addition to homeowners insurance, lenders may also require additional coverage such as flood insurance or earthquake insurance if the home is located in an area prone to these natural disasters.

You should start shopping for insurance a month before closing

When it comes to buying a home, there are numerous tasks to take care of. Aside from shopping for a mortgage loan and finding the right property, it's crucial to start thinking about home insurance early on. While it may not be the most glamorous aspect of buying a home, it is essential to protecting your investment.

Here's why you should start shopping for insurance a month before closing:

It's Often Required by Lenders

Most mortgage lenders will require you to have a homeowners insurance policy in place before they will approve your loan and let you close on the home. This is because they have a financial interest in the property as it serves as collateral for the loan. By requiring insurance, lenders protect their investment in case of disasters or accidents. In most cases, you will need to provide proof of insurance a few days to two weeks before your closing date. Starting your search a month in advance gives you ample time to compare different insurers and find the best policy for your needs.

You Need to Find the Right Coverage

Different homes have different insurance needs. For instance, if your home is located in a flood zone, you may need to add flood insurance to your policy. By starting your search early, you can carefully evaluate the specific risks associated with your property and choose a policy that adequately protects you. This includes considering additional coverage options, such as earthquake insurance or personal liability coverage. Taking the time to understand your needs and compare policies ensures that you don't rush into a decision and end up with insufficient coverage.

It Can Save You Money

Purchasing home insurance a few weeks in advance can result in significant savings. Many insurance companies offer early bird discounts for applicants who buy coverage ahead of time. By shopping around and comparing rates, you may find more affordable options or take advantage of bundling opportunities with your existing insurance policies. This extra time also allows you to properly assess your coverage needs without feeling rushed, ensuring you don't overpay for unnecessary add-ons.

Peace of Mind

Buying a home is a significant investment, and it's essential to protect yourself financially. Starting your insurance search early gives you peace of mind knowing that you're adequately protected. With insurance in place, you can relax and focus on the other aspects of the home-buying process, such as packing and planning your move. It also ensures that you're not scrambling at the last minute to find coverage, which could result in rushed decisions or oversights.

In conclusion, starting your home insurance search a month before closing is a wise decision that can save you time, money, and potential headaches. It allows you to carefully consider your coverage needs, compare different insurers, and find the best policy to protect your new home. By planning ahead, you can ensure that you're not just making a hasty decision but choosing a policy that suits your specific needs and provides the necessary financial protection for your new home.

You'll need enough insurance to cover 100% of the home's replacement value

When it comes to insuring your home, it's crucial to ensure you have adequate coverage to protect your valuable asset. This is where the concept of "replacement value" comes into play.

Replacement cost is the actual dollar amount needed to completely rebuild your home from scratch, including any attached structures like a deck or garage. It is different from market value, which is the amount your house could be sold for, as it does not include the value of the land.

When purchasing homeowners insurance, you'll need enough coverage to safeguard the full replacement value of your home. This means that if your home is destroyed or damaged, the insurance policy will cover the entire cost of rebuilding it. The amount of insurance you need is based on the replacement cost, not the market value or purchase price of your home.

Most insurance companies follow the 80% rule, which states that they will only cover the full cost of damage to a house if the homeowner has insured at least 80% of the home's total replacement value. If you have less than 80% coverage, the insurance company will only reimburse a proportionate amount. For example, if your home's replacement cost is $500,000, you should aim for insurance coverage of at least $400,000 ($500,000 x 80%).

To determine the replacement cost of your home, you can use a replacement cost calculator or hire an appraiser. This process takes into account various factors, such as the location, size, age, and condition of your home, as well as the cost of labour and materials in your area.

By insuring your home for 100% of its replacement value, you can rest assured that you have sufficient coverage in the event of a total loss. This proactive approach to insurance ensures that you won't be left with significant out-of-pocket expenses and provides peace of mind that your valuable asset is fully protected.

You may need separate insurance for natural disasters

When it comes to insuring your home against natural disasters, it's important to understand that your standard homeowners insurance policy may not cover everything. While it typically protects your property from wind and rainstorms, accumulating snow, and fire, common natural disasters like floods and earthquakes are frequently excluded from coverage. Here's what you need to know about getting separate insurance for natural disasters:

Flood Insurance

Flood damage is often excluded from standard homeowners insurance policies. If you live in an area prone to flooding, purchasing a separate flood insurance policy is essential. Flood insurance is available through the National Flood Insurance Program (NFIP) and a few private insurers. There is usually a 30-day waiting period for flood insurance, so it's important to plan ahead.

Earthquake Insurance

Most insurance companies offer earthquake coverage as a separate policy or an endorsement to your existing homeowners insurance. If you live in an area with a high risk of earthquakes, consider purchasing earthquake insurance to protect your home.

Other Natural Disasters

Depending on your location, you may also need to consider insurance for other natural disasters such as hurricanes, tornadoes, mudslides, or landslides. These disasters can cause significant damage to your property, and separate insurance policies may be necessary to ensure you're fully covered.

When to Purchase

It's recommended to start shopping for homeowners insurance about a month before your closing date. This gives you enough time to compare different insurers and find the right coverage for your needs. Keep in mind that some natural disaster insurance policies have waiting periods, so don't delay in getting the coverage you need.

In summary, while your homeowners insurance provides a level of protection against natural disasters, it may not cover all types of events. To ensure your home is fully protected, consider purchasing separate insurance policies for floods, earthquakes, or other natural disasters common to your area. By doing so, you can have peace of mind knowing that you're prepared for whatever nature may bring your way.

Frequently asked questions