When you're buying a house, you may discover that insurance is one of your bank or lender’s requirements for getting a home mortgage. But what kind of insurance are they talking about?
There are actually a few types of insurance you might need when you buy a home. Check out the different kinds to make sure you’re covered.
Homeowners insurance
Most lenders will require you to have homeowners insurance, also commonly known as hazard insurance, and often abbreviated as HOI. This insurance policy covers losses occurring to your home, its contents, loss of its use (additional living expenses) or loss of other personal possessions of the homeowner. It also acts as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.
If you have a mortgage loan, the mortgage holder (e.g., the bank) is also made an insured on the policy to ensure its investment is protected in the event of serious or total damage.
Private mortgage insurance
Also known as PMI, private mortage insurance is an insurance policy that a lender requires if your loan is more than 80% of your new home’s value. In other words, if your down payment is less than 20%, your lender will generally require you to obtain this insurance. This is to give your lender confidence that you can afford your mortgage despite a lower down payment.
As the borrower, you can request cancellation of PMI when you pay down your mortgage to less than 80% of the original purchase price or appraised value of your home at the time the loan was obtained. To cancel, you'll also need a good payment history, meaning that you have not been 30 days late with your mortgage payment within a year of your request or 60 days late within two years.
Title insurance
Lenders require title insurance to protect their investment in case there are any issues with the title (deed) after closing. You can also get owner’s title insurance that protects you as the owner against any financial loss related to liens against the property that you weren’t aware of when you bought the home, other title errors or challenges to the property ownership.
If you are buying a home with cash (and don’t need a mortgage), you won’t be required to get lender’s title insurance, but you might want to consider buying owner’s title insurance to protect yourself against issues down the road. Consult with an attorney so they can review the property’s history and let you know if they foresee any issues down the road.
Flood insurance
If your new property is in an area designated as high-risk for flooding, your mortgage lender will require you to have flood insurance. If the property has some risk of flooding but isn’t considered to be in a high-risk area, it will most likely be up to you to decide whether you want the added protection of flood insurance. Keep in mind that if your home is impacted by flooding, your normal homeowners insurance will likely not cover related damages.
Legal insurance
There are so many legal and financial issues that can come with buying a new home — property line disputes, issues with the contractor in charge of your remodeling, fights with service providers over what is and isn’t covered under your home warranty — and the list can be endless. Legal insurance gives you access to professionals who can help you resolve your legal issues — and who can give you advice on what to do to help avoid legal problems in the first place.
The amount of insurance you need may seem overwhelming, but in the long run, it will save you a lot of heartache to be protected from life's unexpected turns. When it doubt, talk to an attorney about your specific coverages to get you both on the same page.
