When buying a home, you must purchase a homeowner's insurance policy that meets the lender's requirements. Homeowner's insurance protects you and the lender in an accident or disaster involving your home. This article outlines the steps to protect your investment while satisfying the lender.
How do I get homeowner's insurance when buying a home?
Get your homeowner's insurance policy at least two weeks before buying a house. Most mortgage lenders require proof of homeowner's insurance before giving you final loan approval.
The process typically involves the following steps:
Shop for insurance after you're under contract to buy a home. Now, you have a property address so you can start shopping. (View the Sales Contract Explainer.)
After selecting the insurance provider, send the lender the insurance quote. The lender will contact the insurance company for proof of insurance before approving your mortgage.
Pay the insurance company the premium for the first year of coverage a week before closing. Send the lender a copy of the paid receipt.
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How much does homeowner's insurance cost?
The amount you pay for a homeowner's insurance premium to protect your home depends on several factors, including:
the type of property you're buying,
the cost of rebuilding it,
the coverage amount,
and the provider you choose.
At a minimum, your homeowner's insurance should cover the cost of rebuilding the home in case of a total loss or the loan balance, whichever is less.
Your insurance policy must at least cover the following:
100% of the replacement cost value of the improvements, or
The loan's unpaid principal balance provided that it equals at least 80% of the replacement cost value of the improvements.
Lenders check the coverage amount to ensure it meets the minimum requirements. If you're underinsured, the lender will make you increase your coverage before closing.
It is important to note that you'll need additional insurance if you buy in a flood zone, which would increase the cost of insuring the house.
What is the maximum deductible for homeowner's insurance?
When you have a conventional mortgage, the maximum deductible for homeowner's insurance is 5% of the property insurance coverage amount.
Your homeowner's insurance deductible is the amount you pay out of pocket before the insurance company pays for any damages or losses. Typically, a higher deductible will result in a lower premium for homeowner's insurance.
By choosing a higher deductible, you are taking on more risk yourself and reducing the insurance company's risk. As a result, the insurance company will often offer a lower premium for a higher deductible, as they are less likely to pay out for more minor claims.
For conventional loans, lenders limit the deductible to 5% of the coverage amount because they want to ensure you can afford the deductible if you need to make a claim.
Let's say you have a homeowner's insurance policy with a coverage amount of $300,000, and you have a 5% deductible. In this case, the amount of your deductible would be $15,000. If you claim damages to your home, you would be responsible for paying the first $15,000 before your insurance coverage kicks in to pay the remaining costs.
What are the property insurance requirements for FHA loans?
For FHA loans, the homeowner's insurance requirements are as follows:
Insurance coverage required for FHA loans:
The amount of insurance coverage must at least equal the lesser of (1) 100 percent of the insurable value of the improvements as established by the property insurer or (2) the unpaid balance of the mortgage with a replacement cost endorsement to compensate for the full amount of damage or loss to improvements.
Maximum deductible for FHA loans:
Unless a higher maximum amount is required by law, the maximum dwelling deductible for homeowners insurance and flood insurance may not exceed the greater of $1,000 or 1% of the face amount of the dwelling coverage. Concerning wind hurricane coverage, the maximum deductible may not exceed $2,000 or 2% of the face amount of the dwelling coverage.
What type of homeowner's insurance do I need for a condo?
When you purchase a condominium, your mortgage lender will typically require that you have a specific type of homeowner's insurance policy called an HO-6 policy.
HO-6 insurance protects your personal property, liability, and any improvements or additions within your condo unit. Insuring a condo unit is usually cheaper - about half the cost of a house's premium because it only covers your unit's interior.
You and your insurance provider determine the appropriate amount of coverage. The coverage amount must be at least 20% of your unit's appraised value, and the deductible must be no more than 5% of the insured coverage amount.
It's important to note that the condo association has a master insurance policy that covers the building and common areas. However, the master insurance policy doesn't cover your personal belongings or liability within your unit. Therefore, you need an HO-6 condo unit policy to protect you.
Why do I pay homeowner's insurance in advance?
When buying a home with a mortgage, the lender requires that you pay for a full year of homeowners insurance upfront at closing. About a week before closing, pay your insurance company for the annual premium and send the lender a copy of the paid receipt.
Suppose you're paying the future homeowner's insurance through an escrow account. In that case, you pay the insurance to the lender as part of your monthly payments, and the lender pays the insurance company on your behalf.
First, the lender calculates your monthly insurance payments by dividing your yearly premium by twelve. For example, if your annual premium is $1,200, your monthly insurance payments are $100.
Next, they add insurance to your monthly mortgage payments, which you will pay to the lender each month.
Then, when your insurance premiums are due, the lender uses the funds in your escrow account to pay the insurance company for you.
After that, the lender periodically reviews your escrow account to ensure you're paying enough into the account to cover your insurance premiums.
It's important to note that if you pay for your homeowner's insurance in advance and sell your home before the policy expires, you should expect a refund for any unused portion.
Can I change my homeowner's insurance provider after closing a home purchase?
You can change your homeowner's insurance provider anytime, even after you close on purchasing a home. However, your lender may require that you maintain a certain amount of insurance coverage on the property. If you change insurance providers, ensure your new policy meets your lender's requirements.
After changing your insurance company, provide the lender proof of the new coverage. Remember, if you lower your coverage to no longer meet the lender's requirements, the lender may purchase a policy on your behalf and add the cost to your mortgage.