If you’re buying a home, especially for the first time, you may be feeling a little overwhelmed with all of the things you need to do, even after you’re finished with the initial shopping process. There’s inspections, your hammering out your mortgage, possible renovations, the stress of actually moving, and about a thousand other things all ping-ponging around your to-do list: And figuring out what types of insurance you need is probably one of them.
It would be one thing if you could just purchase your homeowner’s insurance and be done with it, but unfortunately, there are actually several different types of insurance to consider when buying a home – again, especially if it’s your first home. You might even need to purchase types of insurance that you’ve never thought about, or perhaps even heard of before, depending on your situation.
Luckily, though, that’s what your Realtor is here for. We’ve run the gamut enough times to know the ins and outs of what happens when you buy a home – even the little details you’re too stressed to even think about. And to help out those of you who don’t feel you know enough about insurance, California mortgage lender Bob Spinoza has written a handy little guide containing info and advice about all of the different types of insurance out there, so you can learn more about them, and begin to determine which ones you’ll need.
Different Types of Insurance to Consider
Let me start by saying that I’m not in the insurance business, but that the insurance business is in mine. And my business is helping home buyers and homeowners get a great mortgage. So just what are the insurance requirements when you buy a home or go to refinance a mortgage on residential real estate you own in California? Why does your lender care about the insurance coverage you keep?
Also known as “hazard insurance,” or “fire insurance,” this type of insurance is the key policy you will be required to carry if you have a mortgage. While the actual coverage may seem to be a clear benefit to you, there’s a mutual benefit for the lender. After all, the home is both where you live and the collateral for the lender’s loan. Without the home itself, it’s unlikely the lender would/could ever be paid back in the event of a loss.
By this logic, some homeowners who are “free and clear,” meaning they have no mortgage, will opt not to carry a homeowner’s policy. This is not the best idea: In the event of a total loss from a fire, for example, they would be completely out of a place to live with no reimbursement for loss of its use. Ouch.
If your lender determines that your property is in a FEMA special flood hazard area, you’ll be required to carry flood insurance. Regulation requires that mortgage servicers impound your flood insurance premium even if your homeowner’s insurance and property taxes are not impounded (aka “escrowed”).
If you don’t live in one of those special flood hazard areas, you don’t have to purchase this type of insurance. But you are worried that your home still may be in danger of flooding, or if you know you live in an area that has had flooding issues in the past, it may still be worth it for your peace of mind to purchase flood insurance. Remember, flooding is not covered under most standard homeowner’s insurance policies.
When you buy a home and use financing, you’ll be required to get a “lender’s” title insurance policy. This type of insurance protects the lender from title defects and future claims against the title (which, like with homeowner’s insurance, could jeopardize their rights to the collateral). You’ll notice that you’re also being quoted an “owner’s” policy, which is technically optional. The vast majority will purchase this coverage too, and with good reason. Should anyone claim an interest in your property down the road, the owner’s policy would provide you cover and the title insurer would step in to deal with the claim. Worth noting is that the owner’s title insurance policy is in effect for the time you own the home. The lender’s policy is in place for the time you hold the specific loan involved in the transaction. If you refinance, you would purchase only a new lender’s policy.
Private Mortgage Insurance
I am including private mortgage insurance or “PMI” in the insurance category because it makes sense that when borrower looks at the voluminous paperwork involved in buying a home, all of the insurance terminology starts to look the same. But this PMI is exclusively related to your mortgage and if you’re putting at least 20% down and/or not using an FHA loan, you may not have this type of insurance at all. So the best way to look at PMI is not as an insurance coverage required by the property, but one sometimes required by the loan.
You also do not need to “shop” for PMI like you would any of the other insurance types listed above, like homeowner’s. Your lender should always attempt to find the least expensive private mortgage insurance available among the eligible providers.
Life insurance is not required when you take on a mortgage. However, it may not be a bad idea. Disquieting as it may be to discuss, life insurance can help a surviving spouse pay off or better manage the payments on a loan in the event of the death of the other spouse, and you can make a very good argument that life insurance is an incredibly responsible financial purchase to consider at the time of home ownership.
So, to recap…
If you have a mortgage on a home, you will always need homeowner’s insurance and a lender’s title insurance policy. You may be required to carry flood insurance. Depending on your loan’s characteristics, you may also be required to have private mortgage insurance. Owner’s title insurance, earthquake insurance and life insurance are up to you.
If you need more help or information about any of these decisions, or anything else related to Real Estate or buying or selling a home, please don’t hesitate to reach out! I’m just a phone call or an email away, and I’m always happy to help in any way I can – whether you have questions about types of insurance, or something else entirely!