Why do I need home insurance to close on my home?
Insurance is required whenever you take out a loan given to you by a mortgage company. Why might you ask? Well, until you pay off the loan, the mortgage company has a direct interest in making sure the house they are giving you the money for stays in a good condition. They want to cover their asset (the house in this case) if there’s damage due to a covered claim. If there were a fire or a pipe burst, they would want to be sure it gets repaired quickly. Simply put, the bank giving you the loan is protecting their money in case something happens to the home & they need to repair it while it is still partially theirs.
With that said, the mortgage company requires that you maintain insurance in your name until you pay off the home. Once you own the home outright, you are not required by any law to maintain home insurance. However, I would still highly recommend maintaining coverage to protect you from having to pay out of pocket for any large, unexpected expenses that can come your way at any time. After all, your home is your biggest asset, let’s protect it.
When do I need to get insurance in place for a home closing?
Once you have an accepted offer on a new home (congrats!), it’s time to begin shopping for insurance! Once contracted on a home you will typically have what is called an “option period” that gives you the chance to inspect the house for damages and explore other fixed costs. You are usually able to back out of the contract if you find anything unexpected during this option period. This is a great time to shop for insurance so you know what that might cost before going too far into the home purchase process!
The ideal time to finalize your insurance for your new home purchase would be no later than two weeks before the closing date. This will ensure you maximize any carrier discounts and also get any underwriting approvals that may be needed. The latest you are able to get your home insurance finalized without any delays in closing is 3 days before the closing in most states.
Example: if your lender tells you your estimated closing is 05/15, it’s best to have your insurance in place by 05/01 and no later than 05/11.
Pro Tip: Once in a while, the price of your chosen policy will be different than the price your lender had penciled in while getting you pre-approved for your home mortgage. In this case, your loan may require additional approval. Having your insurance in place as soon as you’re under contract is the best way to allow the rest of your loan process to flow smoothly.
Why is it important to get quotes from multiple providers?
If you have ever shopped for a new car, chances are you shopped around in more than one place. Why? Most likely because when you knew what car you wanted you also wanted to make sure you could get the best version of that car, for the best price.
With insurance, why wouldn't you do the same? We know which house we are purchasing, now we want to make sure we can get the best coverage for the best price no matter which company that may be.
When you only shop for one insurance provider, they are obligated to give you reasons why that policy or company is the best option for you. In reality, there may be other carriers who can offer you the same or better coverage for a better price, but you may not see that if you only shop with one provider.
Shopping with an independent agent can provide multiple quotes from a variety of insurance providers all at the same time, providing an unbiased opinion and lessening your time investment at the same time.
How do I get the policy I choose to the closing table?
Congratulations! If you have made it this far, you have made it through the hardest part of the insurance process, which is fine-tuning your coverages to best suit your home.
The next part is easy!
The first year you buy a home, the insurance is paid as a part of your closing costs (with the down payment of the house). Once you select your policy, provide your new insurance agent with a point of contact from your mortgage company, and/or provide them with the loan number associated with your mortgage. Don't know where to find your loan number? Don’t worry! As long as you make the connection with your insurance agent and your mortgage company, they'll be able to process the documents needed in order for you to close. Make sure to follow up with your loan officer to ensure they receive the insurance binder.
What if my closing date changes?
“Oh no! Jake, my realtor just called me and said that my appraisal has to be reordered! They said the closing will be pushed back at least a week. How will this affect my home insurance?”
Let me first say this: IT’S OKAY!
If your closing date changes, the only thing you need to make sure of is that you contact your insurance agent and let them know the new closing date. From there, they should make the proper updates and send the new binder to your mortgage provider. I would still recommend that you make sure the documents are received after you request the date change.
We always want to make sure we get our insurance policy dates corrected if the closing date changes so that the policy does not cancel. Remember, if you are closing on a home, the premium is billed to the mortgage company, so the insurance carrier needs payment from closing to keep the policy in good standing.
How is my first year's premium paid?
The first year of your premium is paid through the closing costs that you pay on the day of closing. This is usually when the home buyer, the realtor, and the title company meet to finalize the home purchase.
The first-year premium is not paid when you agree to the home insurance (about two weeks prior). Instead, your insurance agent will send an invoice and evidence of insurance to your mortgage company, which will tell you how much your closing costs will total out to be.
This number (closing costs) is calculated by the amount you choose to put down on the house + any taxes & realtor fees + the yearly insurance premium.
For example, if your loan was $400,000 and you chose to put 20% down, the amount you pay at the closing table would be the yearly insurance premium + any fees that may be associated with the closing, + $80,000 (20% down payment).
If your yearly insurance premium is $1500 and the Realtor fees/taxes are $5000, your closing cost would equal
- $80,000+$1500+$5000= $86,500.
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