Do I need home insurance before I close on a home sale?
Most likely. Most mortgage lenders will require you to obtain a homeowners insurance policy prior to closing and signing on the dotted line even if you’re not moving in right away.
While homeowners insurance isn’t required by law, it is a prerequisite for most lenders before first-time homebuyers can close on a loan. Ideally, you want to have homeowners insurance in force at least three days prior to your closing, which is typically when the mortgage company will ask to see your proof of insurance coverage. Keeping this in mind, you should begin the home insurance comparison process at least a few weeks before your closing date. That way, you can keep on top of the expenses you will have in the first year of homeownership, including homeowners insurance costs, closing costs, and your monthly mortgage payment.
Why Homeowners Insurance Is Required before Closing
For people who own their homes outright, homeowners insurance is not a requirement, although it is still a very good idea. If you are like most new homeowners, you can’t afford to pay the purchase price for a new home in cash, so you will have to obtain a home mortgage loan. When you are approved for a home loan, the mortgage lender needs to protect its interests by having you insure your home with homeowners insurance. This protects the lender for the amount of the mortgage should your home suffer major damage or be destroyed. It gives the lender a way to recoup losses.
Homeowners Insurance Policy Requirements
The policy requirements for homeowners insurance and the amount of coverage you need will vary based on your mortgage lender. But every mortgage lender will require that you insure your home for at least the amount of your mortgage and have coverage for the common perils covered by a standard homeowners policy, including fire, windstorms, vandalism, and hail damage. Some lenders may require you to carry a homeowners insurance policy with full replacement cost coverage.
Additionally, you may be required to include a mortgagee clause in your homeowners policy, which names the lender and guarantees the mortgage company will receive payment if you suffer a catastrophic home loss. This clause can also include language that guarantees payment to the lender if you are responsible for the home damages and are dropped from coverage.
If you have questions about homeowners insurance requirements, make an appointment with your insurance agent to go over your additional coverage options and what you can expect to pay in insurance costs. You can sometimes get a discounted rate for your homeowners insurance premium by bundling your auto insurance and homeowners insurance with the same insurance company.
Other Insurance Requirements
Homeowners insurance and mortgage insurance are two separate coverages, although your lender may require you to carry both. Mortgage insurance protects the lender if you have a down payment of less than 20 percent of the home’s value. It is designed to protect the interest of the lender should you default on your loan. In some cases, you can drop your mortgage insurance (a.k.a. private mortgage insurance or PMI) once you have reached at least 20 percent home equity. This varies by lender, so you will want to see if your mortgage company requires you to carry mortgage insurance.
You may also be required to carry earthquake insurance to cover structural damage or flood insurance to cover water damage to your home, especially if you live in areas prone to earthquakes or floods. These are purchased as separate coverages and generally not included in homeowners insurance unless purchased as an endorsement. Flood insurance can be purchased through the National Flood Insurance Program (NFIP) or the private marketplace.
The types of closing costs and associated fees can vary by lender, but the most common closing costs are:
- Private Mortgage Insurance (PMI): Private mortgage insurance may or may not be required by your lender in addition to homeowners insurance. It is commonly required if you pay less than 20 percent for the down payment on your home.
- Loan Origination Fees: This is an administrative fee charged by your lender for handling the paperwork involved in your closing.
- Points: Paying points at the time of your home closing is a way to lower your interest rate. Sellers may agree to pay part or all of the points in an effort to sell the home, or your lender may agree to include financing for points in the price of your mortgage.
- Escrow Account Funds: An escrow account is an account some lenders require you to have when buying a home. The money you put into the escrow account helps cover required expenses such as flood insurance, property taxes, and in some cases, even homeowners insurance. With an escrow account, the mortgage company takes care of paying these expenses when they are due.
The lender is required to provide you with a document called the good faith estimate, which explains all closing costs. Learn as much as you can about closing costs before your closing date, and ask for an explanation from your lender if there are fees that you do not fully understand.
Getting Insurance Before Closing – FAQs
Should I use the insurance referral provided by my mortgage lender or realtor?
Mortgage lenders and sometimes even a realtor may try to help borrowers by offering a referral for a home insurance quote. We are not saying that you shouldn’t check out any insurance company the lender or realtor may recommend, but ultimately, the decision is up to you. You should do your homework on pricing, coverage options, and the insurer’s reputation. Insurance rating organizations, such as A.M. Best, can let you know the rating of the insurance company.
How do I choose the right deductible?
The deductible is the amount you have to pay in the event of a claim before the insurance company begins paying. Your mortgage company may have certain deductible requirements. You can find this information out from the loan officer handling your mortgage. There are two common types of home insurance deductibles: the standard deductible and the percentage deductible. If you choose a standard deductible option, you will pay the same thing every time you have a claim. The standard deductible ranges from $500 to $2,000. A percentage deductible is typically applied to claims involving wind, hail, and hurricane damage and is a certain percentage of the home’s insured value, usually ranging from 1 to 10 percent. When choosing the deductible, keep in mind that this is the amount you will have to pay up front in the event of a claim. A higher deductible will decrease the price of your homeowners insurance, but you will have to come up with more money when you have a claim.