The Ins and Outs of Buying a Homeowners Insurance Policy when Buying a New Home

Clear up the confusion of buying a homeowners insurance policy when purchasing a home with this buyer's guide article.

Why do you buy a homeowners insurance policy before closing on your new home? Lenders require homeowners insurance because your lender’s mortgage is collateral against the home you are buying. Carrying enough homeowners insurance to cover the cost of rebuilding the home protects both the lender and the buyer.

How Much Homeowners Insurance Coverage Does a Buyer Need to Satisfy a Lender?

Not all North Carolina mortgage lenders have the same requirements and the amount of insurance coverage buyers must obtain will vary from lender to lender. As a general rule of thumb, you can expect that a lender will require a standard homeowners insurance policy to cover the cost of rebuilding your home from the ground-up along with the cost of replacing its main components. Remember, home buyers may also be required to purchase additional coverage, like flood insurance, depending on the location of the home you are buying.

What is Considered Standard Homeowners Insurance Policy Coverage?

Just as all lender requirements for buying homeowners insurance are not the same, not all homeowners insurance plans offer the same coverage. That is why it is always smart to shop around for different insurance quotes prior to closing on your new home in North Carolina. Let’s touch on the basics of homeowner’s insurance coverage.

When shopping around for a standard homeowners insurance policy, you will usually receive quotes which include some or all of the following four essential types of coverage.

  1. Coverage for the structure of your home
  2. Coverage for your personal belongings
  3. Liability protection
  4. Additional living expenses if you are temporarily unable to live in your home because of an insured disaster

And remember, lenders require that policies offer protection against specific disasters. Make sure you understand what is required before purchasing your policy. Some of these disasters include, but may not be limited to, the following:

  • Fire and lightning
  • Damage from hail and windstorms
  • Theft and vandalism
  • Smoke damage
  • Falling objects, like tree branches
  • Damage from the weight of ice, snow, or sleet
  • Frozen plumbing, heating, AC, or other household systems
  • Vehicles (and even aircraft)
  • Riots or civil commotions
  • Explosions

Should Buyers Pay for Homeowners Insurance Before Closing or at Closing?

When buying a home in North Carolina, does it make a difference whether the home buyer pays for homeowners insurance up-front or at closing? Are there advantages or disadvantages to paying a homeowners policy at closing? These are both good questions, and the answers depend on a few factors.

Paying the premium for your homeowners insurance up front and before closing allows you to exclude the premium from your closing costs. However, paying upfront could cause a burden on some buyers who may have struggled to save enough for a down payment in the first place. Do not be tempted to pay your premium using a credit card because your credit is pulled just before closing and if your lender considered your application as borderline to begin with, you could lose your financing.

If buyers pay for hazard insurance at closing, they will be required to pay with certified funds to ensure those funds are not borrowed. There is one clear advantage to paying for homeowners insurance at closing. During the negotiation process, you and your real estate agent could ask for seller concessions and use that monetary concession to cover your initial insurance premium at closing.

Do Buyers Have to Pay Hazard Insurance with Escrow?

Lenders can choose to require escrow for a variety of reasons. For example, borrowers who have a down payment of less than 20 percent of the purchase price are usually required to use an escrow account for insurance premiums and property tax payments. If you are given the option of paying your homeowner’s insurance without escrow, you may not want to take it because buyers who pay via escrow often receive a lower interest rate than those who do not.

Buying a homeowners insurance policy for a new home can be confusing, especially for first-time home buyers. You should never hesitate to ask questions when speaking with insurance agents about hazard insurance to find out exactly what you need to satisfy your lender.

Are you ready to buy a home in Raleigh, Durham, Chapel Hill and the surrounding areas of North Carolina? Contact Red Door Company today to experience a smarter, more successful way to buy your dream home.