Insurance is easy to leave until the last week before closing, and that is when it causes the most trouble. A quote that comes back far higher than you expected can break a budget that looked fine on paper. Checking insurance while you are still choosing a home, before your offer is signed, gives you time to adjust.
Key takeaways
- Lenders generally require proof of homeowner’s insurance before they fund the loan.
- A standard policy does not cover flood or earthquake damage.
- In a high-risk flood area, a government-backed mortgage comes with a flood insurance requirement.
- Get real quotes on a shortlisted home before you make your offer.
Why the lender cares about your insurance
Homeowner’s insurance pays for loss and damage to your property when something unexpected happens, such as a fire or a burglary. Because the house secures the loan, the Consumer Financial Protection Bureau explains that lenders generally require proof that you have it. You will often see it called hazard insurance in loan papers.
The estimated cost appears on page one of your Loan Estimate, in the Projected Payments section. That figure is an estimate. The CFPB suggests doing your own research, and you are free to shop separately and choose the company and policy that suit you.
What a standard policy leaves out
Two gaps catch new owners most often. Standard homeowner’s insurance does not cover damage from floods or earthquakes. It may be possible to add earthquake coverage, and flood coverage is usually a separate policy altogether.
Homeowner’s insurance is also not the same thing as mortgage insurance. Mortgage insurance protects the lender when your down payment is small; it does nothing to repair your home. You may pay for both, and they appear on different lines.
Flood risk is not only for coastal homes
FEMA puts it plainly: floods can happen anywhere, and most homeowners insurance does not cover flood damage. The National Flood Insurance Program, managed by FEMA, sells flood policies through more than 47 insurance companies and its own NFIP Direct. A policy can cover the building, the contents or both, and it is available in the roughly 22,600 communities that take part in the program.
If the home is in a high-risk flood area and your mortgage comes from a government-backed lender, flood insurance is required. Even when it is not required, a home near a creek, at the bottom of a slope or in a low part of town may be worth insuring.
The 30-day wait
FEMA notes that an NFIP policy typically takes 30 days to go into effect. The main exception is coverage bought because a government-backed lender requires it for the loan. Even so, buy it early: a policy you plan to buy after a storm is in the forecast will usually be too late.
What to check on a home you like
- Ask your agent whether the home sits in a high-risk flood zone, and look up the address on FEMA’s flood maps yourself.
- Ask the seller about past insurance claims, water in the basement and roof repairs.
- Get two or three homeowner’s insurance quotes on the actual address, not a general estimate.
- If flood coverage makes sense, get an NFIP quote too; FEMA’s quote tool takes a few minutes, or ask the agent who sells your car insurance.
- Add the yearly premiums, divided by 12, to the monthly payment you worked out in How Much House Can I Afford? A Budget That Starts With the Monthly Payment.
The CFPB’s homebuying guidance also suggests looking up the disaster risk for a home you are considering and finding out whether insurance is available there and what it costs. Do this before you make your offer. Once you are under contract, you have far less room to walk away.
How escrow handles the bills
Many buyers never write a check to their insurance company. Instead, the lender sets up an escrow account, sometimes called an impound account, and part of each monthly mortgage payment goes into it. When the insurance bill or the property tax bill is due, the servicer pays it from that account.
Many lenders require escrow for taxes and insurance, and in some cases the law does. Because premiums and taxes change from year to year, your escrow payment, and with it your total monthly payment, can go up or down. If your loan has no escrow account, you will need to set money aside yourself. The CFPB notes you can ask for an escrow account even if your lender does not require one.
Tip: If you ever let your coverage lapse, your lender may buy a policy for you after giving notice and charge you for it. That force-placed insurance is typically more expensive and may protect only the lender, not you.
Before closing day
Your lender will ask for proof of homeowner’s insurance before closing, and your first year’s premium is often paid at or before the closing table. Choose your policy once your offer is accepted, send the insurer’s details to your lender early, and check that the property address and the lender’s name are spelled correctly on the policy. Our guide to Closing Day on Your First Home: What Happens and What to Bring lists the other papers to have ready.