Insurance Types for First-Time Home Buyers
For most Americans, buying their first home will be the single largest investment of their lives. And, since it takes up to 30 years before the home’s ownership is transferred from the bank to the buyer, it is only natural for both the buyer and the lender to want to protect that investment and minimize their risks. Therefore, every mortgage lender requires a home buyer to have homeowners’ insurance before they can close on their new home.
Unfortunately, insurance can be one of the more complex and confusing aspects of buying a first home, because not every home buyer needs the same type of policy. In this post, you’ll learn more about the types of insurance you might need when buying your first home.
Standard Homeowner’s Insurance Policy
The standard homeowner’s insurance policy is also known as hazard and liability insurance. This type of insurance is designed to protect the homeowner from losses occurring to their home, its contents, and other personal possessions. It also protects the homeowner’s assets should an accident happen at the home or at the hands of the homeowner within the policy territory.
On the standard homeowner’s insurance policy, both the homeowner’s name and the name of the mortgage holder are considered the insured on the policy. This is to ensure the mortgage holder, usually the bank, is protected in the event of serious or total damage.
Title Insurance
Title insurance protects the lender in case any issues with the title arise after closing, so this is a policy every buyer is required to purchase. A buyer can also purchase what is known as owner’s title insurance, which is designed to protect themselves against any financial loss related to liens against the property that they were unaware of they bought the home. This type of policy will also protect them from any potential challenges to the property ownership.
The only way a buyer can avoid having to buy lender’s title insurance is if they are buying their home with cash. In such a case, the buyer may still want to consider buying owner’s title insurance to protect themselves against potential future issues that might come up.
Private Mortgage Insurance (PMI)
Private mortgage insurance (PMI) is an insurance policy that most lenders require on mortgages in which the buyer is putting less than 20% of the home’s value down on the home. This type of insurance is paid monthly as part of the mortgage payment and is included because it gives the lender more confidence that the buyer will be able to afford their mortgage since they are putting less money down.
On most loans, the PMI can be removed once the home has reached 20% equity, meaning the balance of the loan has reached 80% of the original purchase price or appraised value of your home at the time the loan was obtained. To cancel the policy, the borrower needs to have a good payment history and, in most cases, they must contact the lender to request it.
Flood Insurance
If the home being purchased is in an area that has been designated as high-risk for flooding, then the mortgage lender will usually require the borrower to purchase flood insurance. Since normal homeowner’s insurance policies do not cover damage caused by floods and other types of natural disasters, this is considered an add-on.
Legal Insurance
Home buyers are not required to carry legal insurance, but depending on your unique circumstances, you may want to consider getting it. When buying a home, there are many legal and financial issues that can arise, such as property line disputes, contractor issues, service provider problems, and warranty issues just to name a few. Having a legal insurance policy gives a homeowner access to legal professionals who can help them resolve these and other legal issues.
It can be easy to get frustrated and overwhelmed by all the different insurance policies needed when buying your first home, but it pays to remember – insurance is designed to protect you, your family, and your assets should something unexpected happen. The key to success begins with finding the right insurance provider for your needs, so always compare offers and do your research to ensure the policies you’re buying offer you the best combination of value and protection.
