Got homeowners insurance?
For first time home buyers, homeowners insurance sits low on the list of priorities. However, it should be at the top of your list. Most lenders require home buyers to purchase homeowners insurance to receive approval for a mortgage application. Even if you find the rare lender that does not require homeowners insurance, you should buy a policy anyway to protect against Murphy’s Law.
What can go wrong will go wrong.
As a first time home buyer, let’s review what you need to know about homeowners insurance.
Early Bird Gets the Worm
Referred to in the banking industry as a binder, mortgage lenders typically want evidence of a homeowners insurance policy before closing a deal. Josh Lipstone, who is the vice president at Lipstone Insurance Group, says to buy a policy “At least 30 days before the closing, you can start to shop around.” Not having a homeowners insurance policy activated can put off the closing of your mortgage. Another reason to shop around at least 30 days before closing on a home loan is to become familiar with different policies to find the right one to meet your insurance needs.
You should receive quotes from at least three homeowners insurance carriers, which you can get online to save you time. Consumer Reports presents a rating of homeowners insurance carriers, which lets you discover the companies that have the best customer reviews. Giving your insurance company more time to underwrite a mortgage allows the company to assess what you own to determine the correct value of a policy.
Not Everything You Own Gets covered
Many first-time home buyers are shocked to discover that their homeowners insurance policy does not cover everything they own. For example, if a homeowner leaves a sprinkler on long enough to flood the basement, the insurance company probably does not cover the mistake. On the other hand, the insurer covers the cost of the damage caused by a flood produced by Mother Nature.
The rule of thumb is events that should have been prevented by performing regularly scheduled maintenance are not covered by a vast majority of homeowners insurance policies.
You Do Not Need Insurance for the Market Value of Your Home
You do not need to buy insurance for the market value, the tax appraisal value, or the value of the mortgage. The only dollar amount that matters is how much it would cost to rebuild your home after a disaster. Most insurance companies do not include the value of the land surrounding a home when calculating how much it costs to rebuild.
Your insurance company researches to determine the proper value of a home rebuild. Research is often conducted online by reviewing real estate listings. Lipstone says insurance companies do not conduct on-site appraisals unless the value of a home exceeds $750.000.
Homeowners Insurance is for Catastrophic Losses
Filing claims for minor damage is not a good idea, but many first-time homeowners do not know this. Let’s say you put in a claim for damage that costs $3,000 and your deductible is $2,500. Your insurer pays the difference to settle the claim. If you file another relatively small homeowners insurance claim, your insurer might raise your premium to cover its losses. Many insurance companies invoke a “nonrenewed” clause written into a policy. This usually happens when a homeowner files three homeowners insurance claims within five years.
Your homeowners insurance policy should be written to cover a big financial loss, such as the damage caused by a major fire or a severe weather event.
Start learning about homeowners insurance now to ensure you are prepared to close the deal on your first home.