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You’re buying a home?? Congratulations!
I know it may seem nearly impossible to celebrate right now while trying to stay afloat in the riptide that is doing research, signing documents, and dealing with professionals who can’t seem to boil complicated industry lingo down to layman’s terms. But don’t worry, you’re almost there!
If you’re at the point where you are beginning to think about home insurance, you have probably already had an accepted offer, signed a purchase and sales agreement, and set a closing date.
So what’s next?
Well, you’ll need to establish a mortgage and a home insurance policy -- and those two steps sort of work hand in hand.
And while we aren’t totally experts in the financial side of the home buying process at Berry Insurance, we are experts in insurance, and because the two portions are so intertwined, we’ve been able to help walk several of our personal insurance clients through it. (And most of us have gone through it a couple times ourselves.)
Read on to learn more about what to expect when getting insurance while in the process of buying a home.
Select an insurance carrier:
Once you’ve begun working with a lender to establish a mortgage, you will be required to immediately obtain a homeowners insurance policy before the mortgage is finalized.
If you don’t already have a trusted insurance agent or carrier, you’ll want to do some research to make sure you find someone you feel comfortable with writing your personal insurance policies.
You will be able to get a policy through either a direct writer, captive insurance agent, or independent insurance agent, so you’ll want to research which option is best for you.
You’ll also want to take several factors into account such as convenience, responsiveness, experience, reputation, quality of coverage, and price when selecting a carrier.
For more helpful tips to consider when choosing an insurance carrier, check out this article: What to Look For when Selecting an Insurance Agency or Company.
Do you need an insurance policy for a new home? Download this checklist that will help you navigate the insurance portion of the home buying process step by step.
Get an insurance policy with adequate limits:
Once you’ve selected an insurance carrier, you’ll begin working with them to build a customized homeowners insurance policy.
Throughout this process, you’ll want to make sure you have adequate coverage on all sections of the policy. Hopefully, you’ll be working with an experienced, thorough agent who will recommend the right coverages to protect your needs, but we’ll also give a brief overview below of the limits we recommend for each section.
Dwelling:
Dwelling coverage is probably what you think of when you think of homeowners insurance. This section of the policy covers the actual structure of your home if it is damaged from a number of causes.
We don’t have an exact limit recommendation here, because each home’s limits are customized based on the home’s features.
To determine your dwelling coverage limits, agents use a cost estimator tool, evaluating factors such as square footage, number of rooms, HVAC systems, materials, roof style, fireplaces and wood stoves, garages, decks and more as well as zip code to determine cost of labor and materials to determine an estimate of your total home value.
This is called your replacement cost.
Often, people get confused and concerned when their replacement cost is different from the purchase price of the home, thinking they either aren’t fully covered, or are overpaying. This is normal, because the replacement cost is what it would actually cost to replace the house if there were a total loss.
To learn more about this, check out this article: Why is my Home Insured Over/Under Market Value?
Other structures:
This section of a home insurance policy covers damage to structures in your yard, but not attached to your house, such as fences, garages, sheds, pools, and driveways.
Other structures coverage on your homeowners policy is automatically included at 10 or 20 percent of your dwelling coverage, but you can choose to buy more coverage if you have high value other structures like a detached garage or swimming pool.
Personal property:
Personal property insurance includes all of the “stuff” you own in your home or yard. If your property is damaged or stolen, this section of the policy pays to repair or replace it, subject to your deductible.
For personal property coverage, you’ll want to make sure your coverage limit pays for the cost of all your possessions, so you would be fully covered if there were to be a total loss. To figure this number out, just roughly estimate the value of your possessions, overestimating to ensure full replacement coverage.
Keep in mind, some policies may have limitations on covering items like jewelry or fine art. If you want to make sure these items are fully covered, you may want to pay an extra couple bucks to “schedule them” to make sure they are fully covered if they were to be damaged or stolen. Learn more about what you should consider to schedule on your policy here: Everything You Need To Know About Scheduled Items.
Loss of use:
If a home disaster prevents you from being able to stay in your home while it is being repaired, your homeowners insurance will pay for temporary lodging for you and your family through the loss of use section.
Loss of use limits are set by the carrier at either 20 or 40 percent of your dwelling limits.
Medical payments to others:
This section covers emergency medical expenses to a person who is injured on your property from a fall, laceration, a dog bite, or more.
We recommend a minimum of $5,000 of medical payments coverage.
Personal liability:
If someone is injured on your property and sues you for liability, this section covers medical expenses and any legal fees/settlements.
We recommend the maximum of $1 million of liability coverage. While this may seem like a lot, in today’s litigious society it is not completely uncommon to see high-value lawsuits, so the maximum limit is usually worth the slightly higher cost.
Personal injury (optional):
Though not automatically included on a homeowners insurance policy, if you elect personal injury coverage, it would cover libel, slander, or defamation lawsuits.
Generally, we do recommend people opt for the coverage, and carriers would provide coverage up to the personal liability coverage on your homeowners policy.
To learn more about what is (and isn’t) covered under a home insurance policy check out this article: What Does Homeowners Insurance Cover?
Reinforce with other types of insurance:
Now, even though you may have gotten a comprehensive insurance policy with the limits we outlined above, that doesn’t mean you are fully covered.
There is a lot that home insurance doesn’t cover, so you may want to consider getting some separate policies to fill in some of the gaps.
Personal umbrella liability insurance:
Sometimes known as excess liability or personal liability, umbrella insurance supplements a policyholder’s existing liability coverages on both their home (or renters, or condo) insurance and auto insurance. It offers an extension of the policyholders existing coverages.
Umbrella insurance covers the costs of damages or legal defenses arising from incidents leading to property damage or injury when the policyholder is considered responsible.
Specifically, it protects you and your assets if you are found liable for damages beyond what your underlying policies will cover.
This type of policy is fairly affordable, usually around $150 - $300 per year, so it may be worth getting to reinforce your home policy.
Another insurance you may want to consider is flood insurance, because flood damage is actually not covered under your homeowners insurance.
Flood insurance, which is backed by The Federal Emergency Management Agency (FEMA) under The National Flood Insurance Program, covers damages in your home caused from flooding.
Flood insurance protects from floods under the following definition: water that covers at least two acres of land that is normally dry, or that damages two properties, one being your own.
And here’s a tip: just because you don’t live in a high risk flood zone does not mean you don’t need flood insurance. Of the people with flood insurance policies, 25% of those who file flood claims live in low to moderate flood risk areas.
Get your home insurance binder:
Once you’ve worked with an agent to get a home insurance policy, your mortgage company will want proof that you have all the right coverages before moving forward.
This is where an insurance binder comes in.
Your insurance agent will issue you a binder, which is a temporary insurance policy pending the issuance of a permanent policy.
You will then show your binder to your lender, who will review it to make sure you have coverage and that the policy has been paid in full. If they don’t see any issues, they will formalize your mortgage.
The binder expires after 30 days.
Be prepared to escrow:
Escrow: It’s a word you’ve heard but might not be exactly sure what it is.
Well, oftentimes when you are a home buyer (and definitely if you are a first time home buyer) you will be required to escrow. If you aren’t required, you usually have the option.
What this essentially means is your mortgage and homeowners insurance (sometimes even your property taxes) will be lumped together in one payment. You pay that sum to your mortgage company, and your mortgage company pays for your insurance.
Homes are expensive investments. Many lenders require escrow to ensure homeowners have and pay for a homeowners insurance policy so any home damage will be covered and not the responsibility of the lender.
Here’s how it usually works:
Upon closing on your home, you will pay your entire first year insurance premium with your closing costs. After that, you will start to pay your mortgage company a monthly amount towards the next year's insurance premium. At the end of the year when the cost of the new insurance policy is established, you may need to pay more money if you underpaid the premium cost, or you may get a check if you overpaid.
Get your inspection:
Once your policy is in place, you will be notified by the carrier/independent appraiser to set up an inspection of the home.
In addition to looking for attractive nuisances or damages needing to be repaired, the inspector will also confirm the replacement cost determined by the insurance carrier’s cost estimate tool was accurate and you have enough insurance.
If the inspector finds anything that wasn’t caught by the cost estimator tool, you may need to go back to your insurance agent and adjust your dwelling limits.
Get settled into your well-protected home:
While the process may be overwhelming right now, trust us, it will all be over soon and you can kick back in your new cozy home with a celebratory drink and take-out dinner from one of the many restaurants near your new neighborhood!
As long as you make sure you’re working with an insurance agent you trust (could it be us?), make sure you have proper limits in your home insurance policy, and be prepared to escrow, the process should be mostly seamless.
But feel free to reach out to us in the meantime if any questions not covered here come up. After all, that is what we’re here for!
And for more assistance, download the offer below to help you keep organized while navigating the home buying process. It will walk you through all the steps we mentioned above and provide additional helpful information.
