Homeowners insurance protects a homeowner (and lender) in the event of property damage or loss resulting from an “event.” It covers four main areas: interior damage, exterior damage, loss/damage of personal belongings, injuries sustained on the property. Homeowners insurance, aka hazard insurance, is required when getting a mortgage on a home. It’s generally part of your prepaid Closing Costs during the Home Loan Process. A home that is owned free-and-clear (which means the home doesn’t have a mortgage on it) should still have homeowners insurance.
Natural disasters, such as earthquakes and hurricanes, require special coverage rather than standard policies. Check what your standard policy covers if you live in an area prone to disasters.
Here’s What You Have to Do
You are responsible for picking your insurance provider within 72 hours of starting the loan process. The first 72 hours are known as the Option Period. We need your Insurance Agent’s name and phone number so we can contact them to get the insurance in place. It’s key that we are using the correct insurance figures for the underwriting approval. The process slows down if you don’t have your insurance done within the first few days. So, to skip delays, get insurance pronto.
Pick Insurance Agent & Coverage
You pick the insurance provider of your choice (like State Farm, Farmers, All State, etc.). You will also pick your coverage amounts. The coverage amount need to be the greater of the mortgage loan amount or the replacement cost of the home. The reason is because the lender wants to ensure they’ll be enough proceeds to either pay them off and/or rebuild the home in the event of a complete loss of the home.
The majority of the plans we see have deductibles of 1%. Most mortgage lenders will allow coverage plans with deductibles ranging from .5% to 5%. The higher the deductible the lower the annual premium. Note: it may be up to an underwriter’s discretion to allow deductibles above 2% when a borrower is tight on asset reserves.
Please stress the importance of being responsive to our requests to your Insurance Agent. Also, it’s prudent to explore combining all your insurance needs (like home and auto) with one provider to maximize discounts.
Get “Loss Report” ASAP
Setting up your insurance in the first 72 hours of the contract can help you close on time. Doing so helps you avoid the last-minute scramble should there be a prior insurance claim on the home. Ask your insurance provider for a past loss report as soon as you execute a purchase contract. Many insurance companies ask for proof of repairs (such as receipts and invoices) for losses within the last three years prior to issuing an insurance policy. This can cause issues if the sellers have already packed and moved out of the home.
Get your insurance early in the process; when you have time, you have options.
It’s NOT Mortgage Insurance
Homeowners insurance should not be confused with Mortgage Insurance (MI) – they are completely unrelated. Homeowners insurance protects you (the homeowner) and your property in the event of misfortune, such as a home fire. Mortgage Insurance protects a lender in the case that a borrower defaults and has their home foreclosed.
Please call us if you have any questions about the types of insurance and amounts of coverage required for procuring a home loan.