When it comes to getting insurance for your home, it’s usually not an option. Virtually all mortgage lenders require borrowers to have some level of coverage before closing on a home loan.
Reviewing the many types of insurance available can feel overwhelming, especially during the homebuying process. You’ll say to yourself, “I’m already juggling so much to get into my new home, now I have to figure out insurance too?”
In a word, yes.
Here, we’ll go over the most common types of insurance you’ll need (and need to understand) as a homeowner.
There are two types of coverage: a lender’s policy and an owner’s policy. Because of investor requirements, most lenders will require you to purchase a lender’s policy, which protects the lender (and investor) up to the amount of the loan. You pay for the policy at closing.
A lender’s policy will not protect you. You would have to purchase an owner’s policy to protect your financial investment against someone who sues you, saying she/he has a claim against your home before your purchased it.
Like title insurance, homeowners insurance is required if you have a mortgage. It provides coverage for loss from fire, theft, and liability. Homeowners insurance policies also cover a number of items including, in some cases, property like furniture and jewelry. Unlike title insurance, the typical homeowners insurance policy lists the homeowner and the lender as loss payees, meaning that both of you have coverage under the same policy.
Even if you don’t have a mortgage — if it’s paid off, or you paid in cash for your home — you should still get homeowners insurance. Your home is a major investment, holding all of your valuable possessions. If something went wrong, to say that the insurance premiums are money well spent is the understatement of the year.
Private Mortgage Insurance
You’ll usually need Private Mortgage Insurance (PMI) if you put less than 20% down to buy your new home. PMI protects the mortgage lender if, for some reason, you stop making mortgage payments. It covers a percent of their loss if you fail to make your payments and default on the loan.
Generally, you’ll pay premiums for PMI coverage until you’ve paid down your loan balance to at least 80% of the property’s value (in other words, you’ve paid 20% of your home’s value). That 80% amount may vary depending upon on a number of things, such as the date your loan originated; whether it was a refinance or a purchase loan; whether it is a fixed-rate or adjustable-rate mortgage; whether you occupy the home or not; etc. Federal law, state law, and investor guidelines may all play a role in determining if and when you can cancel PMI.
If you can put down at least 20% for your new home, it's worth doing to avoid PMI — which does nothing for you and only benefits the lender. If you have to get PMI, try to get rid of it as quickly as possible.
Flood insurance can be mandatory for homes in flood-prone areas. If your property is located in an area designated by FEMA (Federal Emergency Management Agency) as an SFHA (Special Flood Hazard Area), you’re required to have flood insurance coverage.
Torrential downpours, severe storms, and flash floods can happen at any time.So even if you’re not in a designated flooding area, it might be a good idea to get flood insurance. It’s often very affordable if you don’t live in a low-lying area.