Buying a home is likely the largest purchase you will make in your lifetime, so protecting it (and your belongings within it) is essential as a homeowner. There are several types of insurance associated with homebuying, some of which you have a choice in and others required by your mortgage lender to protect their collateral. See what you need here.
Is It Necessary? Absolutely.
Homeowners insurance, also known as hazard insurance, is required to protect your home, property, and items within. When you get a mortgage, the house is your mortgage lender’s collateral, which is why lenders require their borrowers to have a minimum level of homeowners insurance. Homeowners can increase their coverage to their comfort level.
Homeowners insurance has a variety of coverage, and your losses are only covered by perils stated within your policy. For instance, if your home is damaged due to an earthquake but your policy doesn’t cover earthquakes, your insurance agency won’t pay for damages incurred.
It is important to review the areas of your policy to determine coverage limits. Areas of homeowner’s coverage include:
- Dwelling – damage to the home and areas attached to the home, including fixtures such as plumbing, electrical wiring, heating and permanently installed A/C systems.
- Other Structures – includes damage to fixtures not attached to the home, such as fences, sheds, and freestanding garages.
- Personal Property – covers the items within the home and reimburses you for the value of your possessions.
- Loss of Use – covers costs of living in an off-site location, such as an apartment, if your home was extensively damaged and unlivable.
- Personal Liability – covers financial loss if you were to be sued for injuries or property damage sustained from your property, such as someone falling down your stairs.
- Medical Payments – is part of personal liability and covers medical payments for someone injured on your property.
Is It Necessary? Maybe.
Flood insurance is specific to covering damages incurred by water and flooding. According to Allstate, standard homeowners insurance policies typically don’t cover flood damage. Depending on the location of your home and the risk of flooding in that area, your lender and/or mortgage program may require you to carry flood insurance on top of homeowners insurance.
Private Mortgage Insurance (PMI)
Is It Necessary? If you had a down payment of less than 20 percent, most likely yes.
Private mortgage insurance is required for borrowers who put less than 20 percent down on their home purchase, unless they’re using a VA loan. Mortgage insurance is meant to protect a lender from default, as well as allow borrowers to make a home purchase with a lesser down payment. While some loan types allow you to cancel your PMI once 20% loan-to-value is achieved, others require PMI to be carried for the life of the loan.
Is It Necessary? Yes!
Forgoing title insurance isn’t even an option when you finance a home, because it protects you as a buyer and homeowner, as well as your lender. You’ll pay for your title insurance and title search as a closing cost.
Title insurance is different than the other types of insurance needed to buy a home. Private mortgage insurance and homeowners insurance are policies that protect you (or your lender) from things that happen in the future. Title insurance protects you and your lender for things that have happened in the past like liens on the property for unpaid taxes, mistakes in legal documents, etc. Though a title search is performed before you close on your home, title insurance will defend your rights to the property in the case that something should arise.
Is It Necessary? Use your own discretion.
A home warranty is sometimes offered by home sellers or negotiated by buyers to insure items within the home, such as appliances, heating/cooling units, water heater, etc. for a limited time after the sale of the home is complete. Home warranties are additional and completely optional for homebuyers.
As with any legal contract, make sure you read the terms and conditions of your warranty, especially if you (instead of the seller) are making the investment to purchase it.
More questions about what it takes to buy your first home? Download our free Mortgage 101 Handbook for everything you need to know about buying and financing a home.