Homeowners Insurance Basics: What First Time Homebuyers Should Know

Published on December 20, 2016

– 6 min read

Getting homeowners insurance isn’t a recommendation— it’s a requirement. There is always chance of an accident impacting your home.

It could be something as common as hail damage (about 1 in 32 homes make claims per year) or as obscure as a sinkhole (1 in 100).
 
If disaster strikes, your lender needs to be certain that the home will be rebuilt or repaired. Otherwise, you have no place to live, no reason to make your payment, and the investor who bought your loan no longer has an asset to secure their investment. You will need to protect your house in case of the rare event where it is swallowed by a sinkhole or falls into the ocean. (We couldn’t even make this stuff up if we wanted to.)
 
Once you provide your Intent to Proceed and give your lender all the documents they require, you will hit a lull in the process. Your loan file will go to processing and underwriting. You will be waiting to get your appraisal back. While your lender pushes things along, things will go quiet on your side.
 
We encourage our borrowers to make this break productive and use it to shop for home insurance.

What does homeowners insurance cover?

Home insurance covers quite a few scenarios. You’ll have to check your individual policy, but a basic homeowners insurance policy usually covers damage from:

  • Everyday accidents – Damage from smoke, water, or steam (natural or from your appliances)
  • Natural hazards – Fire, lightning, hail, weight of ice/sleet/snow, freezing of plumbing, heating, AC or appliances, and volcanic eruption
  • Uncommon occurrences – Explosions, falling objects, “artificially generated electrical currents”
  • Human hazards – automobiles, airplanes, riots or “civil commotion,” vandalism, or theft.

Homeowners insurance policies could cover some liabilities, like if your dog bites someone. And they may cover your personal belongings up to your policy limit.

Homeowners insurance exclusions

Again, this will depend on your individual policy, so make sure you thoroughly review your coverage with your provider. But in general, a basic policy will not cover damage from:

  • Certain liabilities – Turns out that treehouses and trampolines are incredibly dangerous. Your insurance won’t foot the bill if someone hurts themselves.
  • Swimming pools – Injury or death from swimming pools may not be included in a basic policy either, so if your new home has a pool or spa, make sure to ask about supplemental coverage.
  • Flooding – As distinct from water damage, this is not included in a basic policy.
  • Mold
  • Sewer backup
  • Earthquakes & Sinkholes (full circle!)
  • Termites
  • War, acts of terrorism, or nuclear accidents
  • Damage due to neglect – Just because you don’t want to pay for maintenance doesn’t mean your insurance company will.

Just because these items aren’t included in a standard policy doesn’t mean you can’t insure yourself or your home against these things. You just need to add the additional coverage to your policy and pay the premium. In some cases, your lender will require you to have specific coverage. One example is the requirement for flood insurance if the property is in a FEMA flood zone.

What does home insurance cost?

The short answer is anywhere from $500 to $2,000 a year on average. The long answer is it depends on where you live, how much your home costs, and how risky your home seems.
Value Penguin has a great table that shows the average cost of homeowners insurance by state. It’s worth looking up your state to get a ballpark estimate.

You’ll need homeowners insurance to close your loan, which means you have a few weeks to figure it out. If you have an insurance agent, they should be able to guide you here. Otherwise you can go online to get a policy.

Pro-tip:
 

    Insurance bundles can start to work in your favor when you buy a home As soon as you start bundling policies (vehicle insurance, homeowners insurance, liability insurance, business insurance, etc.) the large companies have a huge advantage. It’s worth shopping around to try and save money.

 
Here’s hoping your dream house isn’t in a flood plain, above a sinkhole, next door to a power plant, or in a neighborhood with a termite problem. And if it is near one of these things, make sure you’re covered!
 
Have specific questions about homeowners insurance? Chat with one of our licensed Loan Specialists. Ready to get pre-approved? See your rates in 3 minutes.

Steven Fung
Steven Fung is a licensed Loan Specialist at Clara with over 17 years of experience. When he doesn’t have his mortgage hat on, he enjoys repairing old cars and working on home improvement projects.
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