What Type of Insurance Do You Need When Buying a Home?

What do first-time homebuyers need to know about insurance? First, you need it. Choosing insurance and understanding what it covers (and what it doesn’t) can be tricky business. Today, we’re answering the most common questions we hear homebuyers ask about insurance.

Q: What is homeowner’s insurance?

A: Buying a home is typically one of the biggest investments a person makes. Homeowner’s insurance covers the home, its contents, the lot, and the people on the property. If damage or injuries occur, homeowners must file a claim and the insurance processes it. If insurance approves it, the cost of repairing or replacing the issue is covered.

Q: Is there a law requiring homeowners to get insurance?

A: No, it’s not illegal to go without insurance. However, lenders do require homeowners to insure properties with mortgage loans attached. It’s a way lenders protect their investment.

Q: How can I find the right insurance?

A: Talk to several reputable insurance companies, get quotes, and compare them closely. Make sure they offer the same amount of coverage before you make your decision.

Q: How much coverage do I need to get?

A: Calculate the replacement cost of your home and furnishings. Add in how much it would cost if someone were to be injured on your property and what you would need for living expenses if damage to your home forced you to find another place to stay. Choose insurance that covers these situations well.

Q: What does homeowner’s insurance cover?

A: A regular homeowner’s policy covers:

• Repairing and replacing the property and its contents in the event they are damaged. Examples of this would be a tornado or other severe weather, fire, or vandalism.
• Replaces property that is stolen (there are usually limits on things like jewelry and art).
• Living expenses if you must move out of your home because it’s uninhabitable or while it’s being repaired.
• Medical costs if someone is injured or dies on your property.

Q: What does an insurance policy NOT cover?

A: If the homeowner didn’t add flood insurance, flooding isn’t covered. Insect damage and mold aren’t covered. Neither is normal wear and tear on items that need to be replaced periodically, like an HVAC unit or roof.

Q: When do I need to have insurance set up?

A: Once you sign the contract, start shopping for an insurance provider. You’ll need to have it ready at closing (and may have to pay the first year of premiums in your closing costs).

Q: How will my premiums be paid?

A: Most lenders require borrowers to pay insurance premiums into escrow. This means the yearly premium is divided by 12 months and added to your monthly mortgage payment. When the premium is due, the lender pays it on your behalf.

Understanding homeowner’s insurance helps buyers arm themselves with the right coverage. It also keeps them from dealing with nasty surprises down the road.