Buying a house is likely one of the biggest purchases you’ll ever make. With such a major investment it’s crucial to understand the insurance requirements when purchasing a home. Certain types of insurance are mandatory, while others are highly recommended to properly protect your new property. This article will explain the key insurance policies needed when buying a house.
Mortgage Lender Requirements
If you’re financing your home purchase with a mortgage your lender will require you to have certain insurance in place before approving the loan. These mandatory insurance policies protect the lender’s interest in the property in case something happens.
Homeowners Insurance
Homeowners insurance is almost always required by mortgage lenders. This policy covers the dwelling itself and your personal belongings against damage from covered perils like fire, lightning, windstorms, hail, theft, and more. It also provides liability coverage if someone is injured on your property.
Lenders want to know that if there is major damage, the house can be fixed or rebuilt so that you don’t just stop making mortgage payments. The dwelling coverage on your home insurance will pay to fix up or rebuild your house.
Private Mortgage Insurance (PMI)
You’ll probably have to get private mortgage insurance if your down payment is less than 20% of the home’s purchase price. PMI protects the lender in case you don’t pay your mortgage.
This extra layer of insurance isn’t required once you build 20% equity in the home. You can request PMI cancellation once you reach this threshold.
Flood Insurance
If the house is in a high-risk flood zone as defined by FEMA, your lender will make you get flood insurance through the National Flood Insurance Program. This makes sure that flood damage is covered, which isn’t usually covered by homeowner’s insurance.
Title Insurance
Title insurance is mandatory to protect both you and the lender against any issues with the legal title on the home. Coverage for the lender (lender’s policy) is required. Owner’s title insurance protecting your interest is optional but highly recommended.
Title issues like unknown liens, improper deed transfers, and ownership disputes can arise to delay closing or cause legal headaches down the road. Title insurance protects against these problems.
Recommended Insurance Beyond Lender Requirements
You should still think about getting insurance even if the lender doesn’t require it. Getting extra policies can fill in coverage gaps and give you more peace of mind.
Umbrella Insurance
Umbrella insurance provides additional liability coverage above and beyond your homeowners and auto policies. It kicks in when damages exceed the liability limits on those underlying policies.
This extra protection can be critical if you’re sued for a large amount. Umbrella coverage starts around $150-$300 per year for $1 million in additional coverage.
Earthquake Insurance
Earthquake damage is not covered under standard homeowners policies. But in areas prone to earthquakes, like the West Coast, this supplemental coverage can be important.
You can add earthquake coverage as an endorsement to your homeowners policy or buy a separate policy. Premiums vary based on location but can cost up to around $1,000 per year for $200,000 in coverage.
Flood Insurance (Even Outside High-Risk Zones)
Flood insurance is required in FEMA high-risk zones, but it’s also available for homes in moderate or low-risk areas. Around 20% of flood claims come from lower-risk zones, so it’s worth considering for added peace of mind.
The average yearly premium for an NFIP policy is around $700. Rates start as low as $129 per year for homes in moderate to low risk areas.
Home Warranty
While not insurance, a home warranty can provide coverage for repairs and replacements on home systems and appliances that break down from normal wear and tear.
With an older home especially, a home warranty starting around $400-$500 per year can help cover expensive HVAC, plumbing, and appliance repairs. Just check policy limits and exclusions first.
Identity Theft Insurance
This specialized policy can help cover costs related to identity theft, like legal expenses, lost wages, and fraudulent charges. Plans start around $25 per year for limited coverage, but more robust protection typically costs $100-$300 annually.
Key Takeaways
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Homeowners insurance, private mortgage insurance (if under 20% down), and flood insurance (if in a high-risk zone) are typically required by lenders when financing a home purchase. Title insurance is also mandatory to protect your interest as the homeowner.
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Consider recommended but not required insurance like umbrella coverage, earthquake insurance, home warranties, and identity theft plans to fill gaps and provide greater financial protection.
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Shop around and compare quotes, as rates can vary significantly between insurers for the same coverage. An independent insurance agent can help review your specific needs.
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Revisit your policies regularly to ensure adequate coverage as the value of your home and possessions change over time.
Properly insuring your new investment using a combination of required and recommended policies can help you rest easy in your new home, knowing you’ve taken steps to protect it financially. Consult with your real estate agent, lender, and insurance professionals to understand all the options available.
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Legally, you can own a home without homeowners insurance. However, in most cases, those who have a financial interest in your home—such as a mortgage or home equity loan holder—will require that it be insured. And, for your own ongoing financial protection, youll want your home to have adequate homeowners coverage, as well.
Your mortgage lender will require homeowners insurance
Home buyers looking to finance their purchase will quickly learn what those who have a mortgage already know—your bank or mortgage company will most likely require you to get homeowners insurance coverage. That’s because lenders need to protect their investment. In the unfortunate event your house burns down or is badly damaged by a hurricane, tornado or other disaster, homeowners insurance safeguards them (as well as you) against financial loss.
If you live in an area that is likely to flood, the bank or mortgage company will also require you to purchase flood insurance. Some financial institutions may also require earthquake coverage if you live in a region vulnerable to seismic activity.
If you buy a co-op or condominium, you are buying a financial stake in a larger entity. Therefore, your co-op or condo board will probably require you to buy homeowners insurance to help financially protect the entire complex in the event of a catastrophe or accident.
Should I Keep Paying My Homeowners Insurance?
FAQ
What insurance do you get when you buy a house?
Homeowners insurance policies typically cover your dwelling, personal property, liability, and additional living expenses in the event of a covered loss. This type of insurance is generally required by mortgage lenders.
What insurance do you need for your house?
Buildings insurance and contents insurance are standard when buying a house, but you may also want to consider some other insurance if you have the money: Income and unemployment protection – This insurance covers you if you were to lose your job or not be able to work for a while because of illness or an accident.
What is the minimum home insurance required?
In California, there is no state-mandated requirement for homeowners insurance. However, if you have a mortgage, your lender will likely require you to have a homeowners insurance policy to protect their investment.
Can you buy a house without mortgage insurance?
There are ways to avoid PMI with VA loans, USDA loans, and FHA loans, all of which are backed by the government.