Jane Dotson
Homeowners insurance is typically required for anyone taking out a mortgage loan to buy a home. Lenders will often require proof of homeowners insurance before approving a loan, as it protects their financial interest in the property. The insurance should cover the rebuilding cost of the home in case of total loss or the loan balance, whichever is less. When shopping for homeowners insurance, it's important to pay attention to the deductible, which is the portion of the claim you're responsible for, and ensure the policy provides meaningful coverage over four categories: replacement cost, personal property, liability, and additional living expenses. While lenders may provide referrals, it's good practice to compare quotes, pricing, coverages, and reviews before making a decision.
| Characteristics | Values |
|---|---|
| When to get homeowners insurance | Get your homeowner's insurance policy at least two weeks before buying a house. |
| Lender requirements | Lenders usually require you to have homeowners insurance to get a loan. |
| Proof of insurance | You're often required to show proof of homeowners insurance to your lender before they'll approve your loan. |
| Lender protection | Lenders require insurance to protect their financial interest in a property. |
| Homeowner protection | Homeowners insurance protects the equity in your home. |
| Insurance types | Homeowners insurance, private mortgage insurance (PMI), liability insurance, personal property insurance, and additional living expenses (ALE) insurance |
| Insurance requirements | The amount of insurance coverage must at least equal the lesser of 100% of the insurable value of the improvements or the unpaid balance of the mortgage. |
| Deductibles | The deductible is the portion of the claim you're responsible for. A higher deductible results in a lower premium. |
| Supplemental coverage | You may need supplemental coverage for floods, earthquakes, or wind damage. |
| Shopping for insurance | Compare insurance quotes, pricing, coverages, and consumer reviews before making a final choice. |
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What You'll Learn
Shop around for insurance quotes and pricing
Shopping for homeowners insurance is like shopping for any other major purchase. It's a good idea to shop around to find the policy that best meets your needs and budget. While your lender may provide a referral, it's a good practice to compare homeowners insurance quotes and pricing, coverages, and consumer reviews before making a final choice. You can use home insurance comparison sites like The Zebra to easily compare hundreds of quotes in minutes. Getting multiple quotes allows you to compare both the cost and the coverage being offered by various home insurance companies. Remember that the cheapest rate may not be your best option. Have a budget in mind and then find the company that offers the best coverage at that price.
When shopping for homeowners insurance, you should consider the characteristics of your home, how much coverage you want, and your budget. Your homeowners insurance should provide meaningful coverage over four categories. The first is the "replacement cost," which covers the cost of rebuilding your entire home, including outbuildings and other structures, in the event of a total loss. This reflects the current construction costs in your area. Make sure you have enough coverage to replace your house and your personal property if they were destroyed. Your agent can help you determine the cost to rebuild your home. You can also use a home insurance calculator to help estimate coverage limits.
The second category is personal property coverage, which covers the possessions you keep at home in case they are lost or damaged due to theft, fire, or another calamity. Most insurance companies set a personal property coverage limit as a percentage of the dwelling coverage, usually 50% or 70%. If your dwelling limit is $400,000, personal property coverage of 70% would cover $280,000 in losses. Certain items may fall under a specific category with a "sublimit" set by your insurance company. Additionally, if you have any expensive items, such as art, collectibles, jewellery, or engagement rings, you may need to add an insurance rider to fully cover them.
The third category is liability coverage, which protects you from financial settlements if someone sues you after suffering an injury on your property or you cause an accident to someone else on your property. The Insurance Information Institute says that most homeowners policies provide a minimum of $100,000 of liability coverage. However, the institute recommends that homeowners purchase at least $300,000 to $500,000 of liability coverage, especially if you have frequent guests in your home.
The fourth category is additional living expenses (ALE) coverage, which pays for any extra costs of living elsewhere during home repairs for a covered loss. ALE coverage is usually stated as a percentage of your extended dwelling coverage, typically in the 20%–30% range.
When comparing quotes, pay attention to the deductible, which is the portion of the claim you're responsible for. Unlike car insurance, your home insurance deductible won't always be a set dollar amount. It could be a percentage of your policy's dwelling coverage. Your policy may even include a split deductible, where you have a set dollar amount for most claims, but a percentage may apply for wind damage or other covered perils. For example, if you have a wind damage claim for $7,000, and your home's dwelling coverage is $150,000 with a 2% deductible, you're responsible for paying $3,000, and your insurance company covers the remaining $4,000. Make sure the deductible amount is within your budget.
You can often save money by bundling homeowners and auto insurance with the same insurer or by installing a home security or fire alarm system. Additionally, many companies offer discounts for buying other policies with them, not filing any insurance claims in the past three years, or quoting in advance of your policy start date.
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Understand the difference between homeowners insurance and mortgage insurance
When buying a home, you may be required to carry both mortgage insurance and homeowners insurance. While the two may sound similar, they serve different purposes.
Homeowners insurance, also known as hazard insurance, is a requirement for anyone who takes out a mortgage loan to buy a home. It covers the cost of repairing or rebuilding your home and possessions if they are destroyed or damaged by a covered incident, such as a break-in, lightning storm, house fire, tornado, or hurricane. It also covers detached structures on the property, such as a storage shed, gazebo, or guest house. In addition, homeowners insurance provides liability coverage, protecting you from financial settlements if someone sues you after suffering an injury on your property or you cause an accident on your property. The insurance also covers additional living expenses (ALE), which helps pay for extra costs of living elsewhere during home repairs for a covered loss.
On the other hand, mortgage insurance, also known as private mortgage insurance (PMI), is an extra fee paid by the borrower to their mortgage lender. It is designed to protect the lender's financial interest in the event that the homeowner defaults on their loan payments. PMI is typically required when the down payment on a home is less than 20% of the home's purchase price. Once enough payments have been made on the loan to reach more than 20% equity in the home, PMI can usually be cancelled.
While homeowners insurance is tied to the value of your home and property, the requirement to purchase PMI is related to the amount of the down payment. Even when your loan is paid off, it is recommended to continue homeowners insurance to protect your investment, whereas PMI is no longer necessary once the loan terms have been met.
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Know what your insurance should cover
When taking out a loan, it is important to understand the different types of homeowners insurance and what they cover. This will help you choose the right insurance policy for your needs. Here are some key things that your homeowners insurance should cover:
Personal Property Coverage
This covers the possessions you keep at home in case they are lost, damaged, or stolen. This includes items such as clothing, furniture, electronics, and jewellery. Make sure the limit is enough to cover everything you own. Most insurance companies set a personal property coverage limit as a percentage of the dwelling coverage, usually between 50% and 70%. You can also add an insurance rider to fully cover any expensive items, such as art, collectibles, or jewellery.
Liability Coverage
This protects you financially if someone sues you after suffering an injury on your property or if you cause damage to someone else's property. Most homeowners policies provide a minimum of $100,000 of liability coverage, but you might need more if you frequently have guests in your home. The Insurance Information Institute recommends purchasing at least $300,000 to $500,000 of liability coverage.
Additional Living Expenses (ALE) Coverage
ALE covers the costs of living elsewhere if your home is damaged and you are unable to live there. This includes rent, hotel stays, restaurant meals, and other incidental costs. ALE is usually stated as a percentage of your extended dwelling coverage, typically in the 20%–30% range.
Rebuilding Costs
Your insurance should cover the cost of rebuilding your entire home, including outbuildings and other structures, in the event of a total loss. This is known as the "replacement cost" and reflects the current construction costs in your area. To ensure you have the right amount of structural coverage, consider the square footage of your home, local building costs, the type of construction, and any improvements you've made.
It's important to note that homeowners insurance doesn't cover everything. For example, you may need separate coverage for floods, earthquakes, water damage, and infestations. Additionally, damage due to neglect or failure to maintain your property may not be covered.
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Consider using an insurance broker
When it comes to taking out a loan, especially a mortgage loan, homeowners' insurance is a prerequisite. While it is not mandated by any state, it is often required by lenders to approve a loan. This is where an insurance broker comes in.
An insurance broker acts as an intermediary between you and an insurer. They help you find the best coverage based on the characteristics of your home, how much coverage you want, and your budget. They are professionals who represent insurance customers and help them find and purchase the right coverage for their needs. They are similar to independent insurance agents, who arrange for life, home, automobile, and other types of insurance policies, but the key difference is that independent agents represent the insurance companies, while brokers represent the insurance consumer.
Brokers receive commissions from insurers, but they work on your behalf. They can help you find a homeowners insurance policy that fits a particular property or the cheapest available one. They can be particularly helpful if you have an unusual or hard-to-insure property or don't have the time to shop on your own. They can also help expedite the process if you are facing time constraints.
You can still get your own quotes even if you are working with a broker. They can help you compare quotes from multiple companies to ensure you are getting the right coverage at the best possible price. They can walk you through your quotes and help you choose a policy.
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Be aware of the timing of your purchase
When it comes to purchasing homeowners insurance to secure a loan, timing is crucial. While it is not a legal requirement to have homeowners insurance, it is typically mandated by lenders before they approve a loan. Therefore, it is essential to factor in the timing of your purchase to ensure a smooth lending and home-buying process.
As a borrower, it is advisable to start shopping for homeowners insurance as soon as you have decided on a house to purchase. This proactive approach allows you to compare insurance companies, coverages, and rates, ensuring that you find the best policy for your needs. It also enables you to address any issues or concerns that may arise during the lending process. By starting early, you can avoid last-minute surprises and delays in securing your loan.
During the mortgage approval process, your loan specialist will guide you on the specific timing requirements for purchasing homeowners insurance. They may require proof of insurance before closing on your mortgage loan, so being prepared in advance is beneficial. In some cases, lenders may even request the first term of your homeowners insurance to be paid at closing, further emphasizing the importance of timely insurance procurement.
Additionally, it is worth noting that the timing of your purchase can impact the cost of your insurance. Shopping for insurance early gives you more time to explore ways to save money, such as bundling homeowners and auto insurance with the same insurer or taking advantage of discounts offered by certain companies. By starting early, you can make informed decisions that may reduce your overall insurance expenses.
Lastly, it is important to be mindful of the timing in relation to your down payment. If your down payment is less than 20%, lenders will typically require you to obtain private mortgage insurance (PMI). This type of insurance protects the lender and does not insure your property directly. Therefore, the timing of your purchase and the amount of your down payment may influence the type of insurance you need and the overall cost of your loan.
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Frequently asked questions
Yes, lenders usually require proof of homeowner's insurance before approving a loan. This is because the lender takes on a risk when providing a loan to a homebuyer.
Your insurance policy must cover the cost of rebuilding your home in case of a total loss or the loan balance, whichever is less. For FHA loans, the insurance coverage must equal the lesser of 100% of the insurable value or the unpaid balance of the mortgage.
Homeowner's insurance provides financial protection in case your home or possessions are damaged or destroyed. It also covers liability claims if someone is injured on your property.
You can shop for homeowner's insurance and purchase a policy from any provider. An insurance broker can help you find the best coverage based on your home's characteristics, desired coverage, and budget.
You should get homeowner's insurance at least two weeks before buying a house. During the mortgage approval process, your loan specialist will let you know when to buy it, but you can start shopping as soon as you have a confirmed address.
