First-time homeowners might think that once they’ve landed their mortgage, they’ve crossed the finish line of home buying. They still need to purchase homeowners’ insurance and potentially flood insurance. This quick guide addresses the all-important factors in choosing your insurance policies.
Types to Know
The term home insurance covers every type of insurance that covers any type of home. It includes homeowners’, condos, mobile homes, and renters’ insurance. When you purchase a single-family home, duplex, etc., the financial institution handling your mortgage requires homeowners’ insurance. If you purchase a condo, the bank requires condo insurance.
Homeowners’ insurance comes in many forms, ranging from essential coverage of the 10 most common perils (HO-1) to a comprehensive form that covers all perils, regardless of how rare (HO-5). Most financial institutions require a homeowner to purchase at least a HO-3 policy, which covers 15 common perils. To cover a mobile home, a home buyer needs HO-7 coverage with specialty coverage for mobile homes. Buyers of historical homes or architecturally significant homes need a HO-8 policy.
You May Need Flood Insurance
No homeowners’ policy covers floods; only flood insurance does that. According to U.S. law, if your future home lies within a flood zone, the seller must reveal this before your purchase, typically when advertising the home for sale. You must purchase flood insurance for the home to qualify for a federally insured mortgage. Federally insured refers to financial institutions that carry the label Federal Deposit Insurance Corporation (FDIC).
The Federal Emergency Management Agency (FEMA) maps flood zones, constantly updating its U.S. maps. The government requires homeowners in high-risk flood areas to purchase flood insurance. About 25% of flood damage occurs outside high-risk flood zones, so consider purchasing flood insurance to cover this gap in homeowners insurance coverage.
What Are Perils?
The insurance industry refers to damaging events, such as tornadoes and fires, as perils. Annually, about 358,000 house fires occur. The commonality of that peril means it falls within the 10 included in an HO-1 policy and higher.
An event doesn’t have to refer to something that damages the property to qualify as a peril. It can also refer to theft, the removal of something from the home without permission. According to the Insurance Information Institute, 97.7% of home insurance claims filed cited theft as the reason. It appears on the list of 10 perils covered by all levels of homeowners’ coverage.
When Isn’t Homeowners Insurance Required?
A few homeowners don’t go through typical mortgage channels. Instead, they use alternative methods of loan obtainment, such as peer-to-peer lending, or buying the home with cash. Even though these methods do not require homeowners’ insurance, a homeowner should still purchase it or have the means to self-insure for all losses. That means if you could easily cover damage from theft and the law doesn’t require insurance, you could get away without having it. That doesn’t mean you should.
Paying out of pocket for damages and to replace stolen items isn’t fun. Weigh the small cost of monthly premiums against paying for a break-in and theft. In most cases, insurance costs less than paying outright for a loss.
In most cases in the U.S., a first-time home buyer must purchase homeowners’ insurance to obtain a mortgage. Some peer-to-peer lending options may not require this, but it’s still a good idea to buy it. Similarly, obtaining a federally backed mortgage requires flood insurance if your property sits in a high-risk flood zone. Budget for these added costs when planning your home purchase because each policy type can add around $200 to the monthly purchase price of a home.