Buying a home entails more than the cost of the house itself. You may be prepared to pay a range of closing costs, but one checklist item that may sneak up on you is the need to purchase homeowners insurance before the sellers hand over the keys.
In most cases, a buyer will need to show proof of homeowners insurance in order to take possession of the home at closing.
Here’s what first-time homebuyers need to know before shopping for homeowners insurance.
Recommended: How Much Are Closing Costs on a New Home?
What Is Homeowners Insurance?
Homeowners insurance coverage provides protection for both a home and its contents against damage, theft, and up to 16 named perils. It also typically includes personal liability coverage for accidents that may happen on the property (think of people slipping and falling down your stairs, or your dog biting a neighbor on the property).
It’s important to note that basic homeowners insurance likely excludes coverage of damage from disasters like floods and earthquakes, and even war (seriously). (Then again, volcanic eruption is usually covered.)
Homebuyers who live in an area prone to certain events may want to consider supplemental coverage, or may even be required to purchase it by their lender. Many property owners, particularly those in high-risk flood areas, may be required to have flood insurance, FEMA says. That is a separate policy.
The Insurance Information Institute advises learning what’s generally covered by each homeowners insurance policy type and what isn’t.
When You Need to Buy Homeowners Insurance
If buyers plan to take out a mortgage to purchase their home, their lender will likely require them to obtain homeowners insurance coverage before signing off at closing.
In reality, this is a sound business tactic, as the lender will want to protect its investment, which is the property, not the person it’s lending to (harsh, we know). If the home is damaged in a windstorm or burns to the ground, insurance will cover the cost, after a deductible, without burdening the homeowner, who can then continue to pay their mortgage on time, much to the delight of the lender.
(Your deductible will be either a specific dollar amount or a percentage of the total amount of insurance in your policy, according to the Insurance Information Institute.)
Again, if you live in an area prone to certain disasters like floods or earthquakes, your lender may require additional coverage, so make sure to check with your lender on what’s necessary before signing.
If a person’s first home happens to be a condo or co-op, the board may also require specific coverage, thanks to a shared responsibility for the entire complex.
Recommended: How to Buy an Apartment
Can You Forgo Homeowners Insurance?
Technically, there are no laws requiring a person to obtain homeowners insurance, but it’s a rule put in place by lenders.
If you’re paying cash for a new home, you can forgo purchasing homeowners insurance, though that may be a risky proposition.
Think you can somehow snake the system? Think again. If a lender doesn’t feel that the client is working hard or fast enough to find homeowners insurance before closing, the lender may go ahead and purchase insurance in that person’s name with what’s called “lender-placed insurance.”
This isn’t as cool as it sounds, because not only will it increase the mortgage payment but lender-placed insurance can also cost two to three times more than traditional homeowners insurance. And it may not even provide all the protection a homeowner needs or wants.
Moral: It’s best to start shopping around a good 30 days before closing to find the right policy.
How Much Coverage a Person Needs
How much coverage a new homeowner needs will depend on the value of their home and the possessions in it. As a first step, would-be homeowners can ask their agent for a recommended amount of coverage.
After determining that number, it’s also a good idea to take stock of belongings and see if any items may require additional coverage (think expensive antiques, paintings, or other irreplaceable items).
It could also be smart to photograph and digitally catalog major items in a home for proof needed on any claims.
Recommended: Which Insurance Types Do You Really Need?
Replacement Cost vs. Actual Cash Value
When shopping for homeowners insurance, there’s replacement cost coverage and actual cash value coverage.
Replacement cost coverage pays the amount needed to replace items with the same or similar item, while actual cash value coverage only covers the current, depreciated value of a home or possessions.
This means that if you have actual cash value coverage and disaster hits, you’ll only be able to get enough cash for the depreciated value of the home and items, not the cost of what it may take to replace them.
Most standard homeowners insurance policies cover the replacement cost of a physical home and the actual cash value of the insured’s personal property, but some policies and endorsements also cover the replacement cost of personal property.
The upshot: It’s best to go for replacement cost coverage whenever possible.
Is homeowners insurance required to buy a home? If you’re taking out a mortgage, that’s almost always a “yes.” It’s worth looking at your options, and knowing what will be covered and will not, so you can feel at ease in your new home for years to come.
On that shopping journey, check out SoFi Protect, highlighting a variety of insurance partners, and particularly the homeowners insurance offerings from SoFi partner Lemonade, a licensed and regulated insurance carrier that takes a flat fee and donates any leftover money to nonprofit partners chosen by customers.
There are no brokers or paperwork. And policies start at $25 a month.
Register with or log in with SoFi, and check your price. Lemonade will send the quote to your lender and handle the back-and-forth.
SoFi offers customers the opportunity to reach the following Insurance Agents:
Home & Renters: Lemonade Insurance Agency (LIA) is acting as the agent of Lemonade Insurance Company in selling this insurance policy, in which it receives compensation based on the premiums for the insurance policies it sells.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.