There are many steps that you have to take in order to buy a house. Buyers have to negotiate financing, get through a home inspection and sign a ton of paperwork, all of which can be pretty overwhelming. They also have to pay closing costs, make a down payment and cover the cost of property taxes.
Because there are so many expenses associated with buying a home, it may be tempting to rush through purchasing a homeowners insurance policy. Many lenders require homebuyers to close a loan, unless you are paying in cash. Here’s the why you need an insurance plan before you can get approved for a mortgage loan and the best way to find the right insurance for your needs.
Sharing the risk of owning a home
If your home is financed with a mortgage, your lender can require you to have a standard homeowners insurance policy. He can also require you to have supplemental coverage, like flood or earthquake insurance, if your home is susceptible to certain risks. When you close on your home, you’ll need to provide documentation that you have purchased an adequate amount of coverage. Lenders may also ask you to name them as a lien holder. This protects both you and the lender, since you both have something to lose if anything happens to the property.
A lender (which is often a bank) takes a risk when it provides a homebuyer with a loan. Think about it: If you’re making a 20% down payment, the bank is responsible for 80% of the home’s value. Until you pay off the loan, the lender is technically still the owner — at least in terms of fiscal responsibility. That’s why lenders do what they can to ensure their stake in a property is protected.
Lenders typically require homeowners to have a minimum amount of insurance, or enough to cover the balance of a mortgage loan. Additional coverage for your possessions usually isn’t their concern. Their top priority is confirming that the home you’re purchasing is insured. Keep in mind that the total amount of coverage you need may be higher than the amount of coverage your mortgage provider expects you to have.
Back-up plan: lender-placed insurance
Before a mortgage loan is finalized, borrowers can shop around and purchase a homeowners insurance policy from any provider. However, if a homebuyer cannot provide proof of insurance, the policy lapses or a lender doesn’t think there’s enough coverage, a lender will implement what is known as lender-placed insurance. This type of policy is placed by a mortgage provider but paid for by borrowers, usually along with their monthly mortgage payments. Lenders legally have the right to protect their financial interest in a property and one way to do that is to force-place insurance.
Lenders and borrowers often have different ideas about how much insurance premiums should cost. Homeowners who have had to pay for force-placed insurance often complain that it’s more expensive than a policy they could have found on their own. What’s more, lender-placed insurance tends to provide less coverage than a typical homeowners policy.
The case for finding your own insurance provider
Though you may be able to purchase a homeowners policy through your bank or another mortgage lender, it’s best to be proactive about finding your own insurance. After all, you don’t want to end up paying an above-market price for force-placed insurance. Besides the fact that lender-placed insurance can be expensive, there’s another reason why you’ll want to select your own insurance provider. Once a lender takes control of your coverage, changing policies can be difficult.
When you’re looking for homeowners insurance, try to find a provider with affordable premiums, good customer service and coverage designed to meet the needs of modern homeowners. Perhaps most importantly, you’ll want to secure replacement cost coverage. That way, your insurance policy will cover the cost of repairing or rebuilding your home in the event that it’s completely damaged. You should also consider what standard homeowners policies cover because there are certain risks that they usually don’t account for.
It’s important to have homeowners insurance and if your mortgage lender is the one to remind you of that, it isn’t the end of the world. That doesn’t mean you should expect your lender to provide you with a policy. Your lender may not be looking out for your best interests and you may end up paying high premiums.
If your insurance premiums seem unaffordable, consider asking for discounts, trimming non-essential coverage or raising your deductible. A higher deductible could reduce your premiums by as much as 25% according to the Insurance…CLICK TO TWEET
If your insurance premiums seem unaffordable, consider asking for discounts, trimming non-essential coverage or raising your deductible. A higher deductible could reduce your premiums by as much as 25% according to the Insurance Information Institute. Keep in mind that the policy you’re purchasing can potentially save you thousands of dollars if something happens to your home.
Buying insurance is just one part of the home-buying process. It also allows you to learn more about your home and future risks or rewards. Ask about the home’s age, structure, electrical, heating and plumbing before you sign on the dotted line. Get a copy of the home’s Comprehensive Loss Underwriting Exchange (CLUE) report, which will contain information about any insurance claims filed by the property’s previous owners.
Finally, consider whether you’ll need certain materials to protect your house from storms and other weather-related events that may impact your area. Having wooden frames, for example, might make sense if you live on the West Coast and you’re concerned about earthquakes. When your home is fully protected, you’ll likely have lower insurance premiums. And you’ll feel safer knowing you have adequate coverage.
Have questions about how to find the right insurance coverage to meet your leaders needs and give you peace of mind? Speak with a Hippo specialist.