Real estate must be insured before a lender will close on a mortgage. First time house buyers need to buy homeowner’s insurance before closing on their property and have the policy approved by the lender before closing.

If they buy a condo, the condo association has already chosen the insurance and is paying for it through the condo fees. For condos, the insurance needs to be approved by the lender, but the buyer does not need to purchase insurance before closing.

Things you need to know about homeowners insurance:

Every lender requires homeowner’s insurance before they provide a mortgage for a property. It only makes sense. The lender wants to be sure they can recoup their investment in your house or condo, if it is damaged.

Payments: House buyers need to purchase an entire year of insurance before closing. Then, they also add three months of insurance payments to their first escrow payments, which are included in the closing costs.

Why are you paying 15 months of insurance?

Your lender’s mortgage servicing company will be paying next year’s bill. Not you. The lender wants to be 100% certain that your taxes and insurance are paid. So, they collect the funds to pay your bills for you. (They collect a few months of taxes, too) Next year, your lender wants a whole year’s worth of insurance payments, plus a cushion in case the bill goes up. The three months you pay at closing are funds available when your insurance bill comes due again.

Coverage: The insurance that lenders require might not include coverages that will make you really “insured” for problems that might arise. When you choose your homeowner’s insurance, your agent will tell you what lenders require. They may offer other coverages that you might want, depending on their cost.

At a networking breakfast with Hunter Carroll, owner of Goosehead Insurance in Haverhill, MA, he told me about the coverages he recommends for peace of mind. The following is from Hunter:

Here are my 5 recommended coverages that are not always included in a homeowners policy:

  1. Water back up/sump pump failure coverage: This provides coverage for water damage to your property caused from water that backs up through your pipes or sump pump failure. When I worked in claims, this was the most common denial letter I sent out as many homeowners policies did not have any or enough coverage. I recommend at least $10,000 of coverage as repairs can quickly cost thousands of dollars.
  2. Identity Theft Coverage: Many insurance companies will offer ID theft coverage for about $1 extra per month. Given the prevalence of ID theft in the world today, adding this coverage can provide some peace of mind and a support team (depending on your specific insurance carrier) to help you if your ID were to be stolen.
  3. Personal Property Replacement Cost: Many homeowners policies only insure your personal property (clothing, furniture, personal computers, etc.) for actual cash value. That means a claim payment would be reduced based on the condition and age of any item lost. If you add the Personal Property replacement cost endorsement, then you will receive enough money to buy a new item in today’s market without any deductions for depreciation.
  4. Personal Injury coverage: Your liability portion of your homeowners policy ordinarily would not protect you from libel or slander lawsuits, but you can add this protection for about a $1 extra per month. I especially recommend this coverage for parents of kids active on social media since they could potentially be held liable for anything written by their children.
  5. Extended Dwelling Coverage: This coverage provides additional coverage over and beyond your home’s replacement cost value in the event of a large event (such as a hurricane) that causes significant damage (and claims) in your area. After these events, demand for goods and labor to repair homes is very high, which can cause their prices to spike. Adding this endorsement provides additional coverage so that you are able to complete home repairs ASAP without having to pay out of pocket.

Rona again: My professional association, The National Association of Exclusive Buyer’s Agents, did a podcast about insurance last month. Here’s the link.