09 Aug Getting Home Insurance Before Closing: Complete Guide
Getting Home Insurance Before Closing: Complete Guide
You are house hunting, and you think you just found your perfect house, but you find yourself wondering if you need to purchase home insurance before closing. The good news is, we have all the information you need on the matter!
So, do you have to get insurance before closing? The answer is, if you are purchasing a house with a mortgage, you must buy home insurance before closing. The reason for this is that the lenders want to protect their investment. If you do not have homeowners insurance, it is very possible that no one will grant you a mortgage.
Just as you are trying to protect your investment of a home, they are trying to protect their investment of a mortgage for your home. So, with all that said, let us get into detail on what Home Insurance is, what it covers, and why you need it before closing on your beautiful new home.
What is Home Insurance?
Home insurance is an insurance policy that you can purchase from many home insurance agents. The goal of Home Insurance is to protect your home, property and belongings in cases of disaster. With that being said, there are certain things that are and are not covered. Mainly, insurance companies do not cover damages that are out of the homeowners control, or disasters that are due to locational hazards. But what is really important, is what they do cover and what it can do for you.
What Does Home Insurance Cover?
Home Insurance covers damages caused by fire, hail, lighting, vandalism and a few other perils. But it can only do so through purchasing certain policies. The main policies you will want to purchase is the following:
Dwelling – A dwelling policy pays you to repair and/or rebuild your home if it is damaged by a covered cause of loss, such as a fire or storm.
Other Structures – This policy covers detached structures on your property, such as garages, fences and sheds.
Personal Property – This policy is designed specifically to cover what is inside of your house, such as furniture, art, jewelry and electronics.
Liability – Liability covers you if you are sued or receive a claim against you or a member of your household.
Loss of Use – And lastly, this policy helps you pay for your living expenses if you need to leave your house after it is damaged and during its repair.
Minimum Home Insurance Needed?
Just as auto insurance companies require a minimum amount, some mortgage lenders also require a minimum amount of home insurance coverage for them to grant you your mortgage. However, this minimum amount will vary from state to state, as well as from lender to lender.
The minimum is not a dollar amount, but a level of coverage through your Home Insurance. The level required depends entirely on location, building codes, type of home, and other similar variants.
A mortgage lenders main concern is that your home insurance protects against anything that can damage your, and their, asset. Lenders care about your home, but they do not take into account the land, your belongings or any other structures on your new property. If there is a disaster, your lender wants to make sure that you, and they, do not lose any value on the asset.
In addition, mortgage lenders also require liability insurance. Having liability insurance protects you if you are sued. Since your home is most likely your most valuable asset, the person suing you can go after your home. And since the mortgage company has lent you the money, they too have stake in your home. If you were to lose your home, then they lose out on the asset as well.
Once you receive your home insurance, your mortgage lender will most likely grant your loan and won’t require any changes. All that they will require is that you do not lapse on your payment. And, if for some reason you must get a second mortgage, the guidelines will most likely be less strict.
Other Possible Insurance Requirements
Another thing you may want to keep in mind, is that your home may require additional requirements due to its location. For instance, if your home is located in a flood zone, your home could be considered a risk. This risk may cause your mortgage lender to require additional insurance coverage.
A regular homeowners policy does not cover you in cases of flood, but if you live in a flood plain, you can purchase flood insurance to satisfy the mortgage lender. If the home you are wanting to buy is located in a flood zone, you can purchase flood insurance through the Federal Emergency Management Agency (FEMA).
The cost of any additional policy will vary, depending on your home’s risk level. As an example, if the risk for your home is not very high, you could pay as little as $200 a year. However, the high your risk is, the greater the dollar amount will be that you will need to pay. Risk is measured by how likely your home is to be struck by some disaster, like the flood mentioned above, or by earthquakes and hurricanes.
All of those are not included in traditional home insurance. So, while the house on the coast may be amazing and have beautiful views, the additional bills for more insurance may not be so beautiful. Now that you have read what mortgage lenders require, now we will talk about what you require of yourself.
How Much Home Insurance Do You Need?
When choosing what home insurance you need, remember that you need to meet the lenders requirements, as well as what you need and your home needs. To help you understand what amount you need, we will break down several items of consideration.
Rebuilding Costs – Before setting your home insurance, you should go through the process of figuring out how much it would cost to rebuild your home, either through your insurer or a broker. Factors to keep in mind are local construction cost, square footage and the size of your home. Your mortgage lenders will be doing the same.
A good way to gage this cost, according to the Insurance Information Institute, is to multiply the total square footage of your home by local per-square foot building costs. You can get this information from realtors, building associations or from insurance agents.
While this is the main cause of price, there are some other variants to consider. These variants are items like type of home, materials used, special features, such as fireplaces, and number of rooms.
Personal Property Coverage – This specific policy covers your belongings. Typically, one of these policies provides about 50 percent to 70 percent of your home’s worth for contents coverage. As mentioned above, mortgage lenders do not care about the items inside your house, just the house itself. This is why they do not require this coverage for mortgage lending. However, this is something you may require to protect your purchased property.
It is a good idea to take inventory of what you do have in your possession. Doing this shows you if you have enough coverage, or if you need to purchase addition coverage. The main items you want to ensure are covered are your expensive items, such as electronics, artwork and jewelry. If your regular coverage does not cover all of your property, you may want to consider adding coverage.
Liability Insurance – As mentioned above, this policy protects you in case you, or any members of your household, are sued or a claim is made upon you (them). A standard homeowners policy may start at $100,000 worth of liability insurance. Unfortunately, that is likely not enough to properly cover you or anyone.
The specific amount you need will vary, depending on your situation and assets. If you own multiple properties in high-value areas, you will need more liability coverage. If you do not, then you will need less amount of coverage. However, most insurance agents recommend you purchase at least $300,000 worth of liability coverage. But, if you are assets are very high, you could consider purchasing umbrella insurance, which offers additional liability coverage up to % million.
How Much Does Insurance Cost?
So, not we have reached the big, important, question. How much does insurance cost? Well, there is no straight answer. What you pay for depends entirely on what the minimal coverage needed in your area is, how much coverage you need for your belongings, as well as how much liability insurance you think you need.
Another key item for how much your home insurance will run you, is what deductible you choose. A great tool to judge how much you will need to spend is insurance.com’s average home insurance rates tool. You can use this tool to look up your zip codes rates in accordance to different coverage levels.
Requirement of Home Insurance
As mentioned at the top of the article, if you are choosing to purchase your new home by means of a mortgage, then home insurance is required. However, if you do not need a mortgage, then you do not need home insurance. With that being said, that does not mean to get rid of home insurance, or avoid paying for it. You home is most likely you largest asset, that means you should protect it. Losing your home to a fire or storm could end in you becoming homeless.
Having home insurance will protect you in this case, as well as many others. Many people are faced with damages from floods, fires, storms, and unfortunately, vandalism. The cost to repair these damages by yourself could be bankrupting, that is why it is worth the payments to protect yourself.
Purchasing Home Insurance Before Closing
So, if you are purchasing a home without the need of a mortgage, then you do not need to buy home insurance before closing. However, if you are part of the majority who need a mortgage, then you will need home insurance prior to closing.
In most cases, you will be required to show proof that you have all the proper coverage for your home for the lender to grant you your mortgage. It is best to follow our guide on what minimal coverage you need. Once you have purchased the minimum and gotten the house, you can then go back and add any additional coverage you need.
Paying Home Insurance Up Front
In many case, to get your mortgage lent, the lender will require you show them proof that you have purchased one-year of coverage. Now that can be concerning for some as it can be a heft amount. But, with such a cost, there has to be some reward, right?
Paying your homeowners insurance premium all at once, and before closing, allows you to exclude that premium from your closing costs. Generally, closing costs include lender and other fees that you are responsible for, in addition to your down payment on the property.
Additionally, you may be asked, or choose, to set up an escrow account, depending on your mortgage agreement, to avoid paying large sums all at once. This escrow account is basically a savings account designed to help you pay your mortgage, property taxes and even homeowners insurance in periodic installments. And, your lender is the one who usually deals with payments from your escrow, which makes for much less stressful financial management for yourself.
Summing It Up
I know that was a lot of information, so I’ll give you one last, quick, recap of it all.
When it comes to home insurance and closing, if you are one of the many who needs a mortgage, then you will need to have purchased the insurance prior to the closing. If you are financially gifted, and do not need a mortgage, then you do not have to own any home insurance prior to.
For those who do need the insurance, there is a minimal amount required, and it varies depending on your location, the state, and even the lender of which you chose. You must meet this minimal requirement, but can purchase more than the minimal.
Purchasing more than the minimal can ensure that all your property is insured and you can live without worry. If all you choose is to purchase the minimal, then you will have at least $100,000 in liability coverage, and the home itself will be protected from certain damages, like fire, hail, lightning and vandalism. However, damages from floods, earthquakes and hurricanes will need to be purchased separately.
With all these variants in coverage, comes varying price points for your insurance. In some cases, having more coverage is better for those who can afford it. However, you can also just pay for the required minimal amount. This will mean not all of your property is protected, but you will remain with money to live on, for those with small budgets.
In addition, you can also pay for your home insurance in one fail swoop. This can be a hefty toll up front, but it does have its benefits. Doing so grants you more budget space later on, as well as gives you the chance to deduct it from your closing costs. Also, doing so may allow you to set up an escrow account that will help you make future payments and give you a less stressful financial management plan.
After all of this, here is what we want you to walk away knowing. Purchasing a home is a great responsibility and burden. But, it also gives you a great amount of security. Not all are ready for this step at the same time. Deciding to purchase a home can be very difficult. Take your time, shop around and find what best works for you at what best time.
Talk with real estate agents, talk with mortgage lenders and talk with home insurance agents. Hey are the experts in the field at which you are playing. Take advantage of their knowledge and use it to the best of your ability. Buying a home is a huge step in everyone’s life. Taking your time to do it right, even if that requires a little extra each month out of your wallet, will end up saving you big time at the end. The world is full of random disasters. It is best to protect what your own, instead of wishing you had before it was gone.
This article was sponsored by Chris Lile, State farm Agent in Tulsa, Oklahoma. Chris Lile specializes in Home, Auto, Business, Property, Life and Health Insurance. Chris Lile is a Third Generation State Farm Agent Recipient of the “Heroes of the Heart” Award. Chris Offers a few other products and is available to help you any day of the week. You can check his site out here, to learn more about Chris Lile, the State Farm Insurance Agent.