Homeowner's Insurance: What to Do When You're Buying a House

Admin
Nov 8
7 min read

So You're Buying a Home, Now What?

When you're buying a house, one of the main things lenders want is that you get homeowner's insurance. A lot of people already have it or know they need it, but the details of what homeowner's insurance covers and why lenders care so much about it aren't often explained.

Plus, stuff like escrows, mortgagee clauses, and replacement cost can be pretty confusing and complicated. If you don't know what these terms mean, you're definitely not the only one. Most people aren't taught the ins and outs of buying a home. In this post, we'll break down these topics for you.

Escrow and Insurance

Escrow is the term used to describe an account allocated for the mortgage payment, the property taxes, and the homeowner insurance monthly payments. This is often managed by a third party, separate of the lender who provided your loan. The main purpose, is to facilitate the payment of the taxes and insurance, which protects the lender's investment (your home). As explained by US Bank, "Your lender pays these bills on your behalf with the funds collected from you."

The homeowner's insurance is the coverage provided in agreement for payment, to repair or rebuild the home in the case of a covered event. When you are in the process of closing on a home, the lender will typically request that you provide quotes for homeowner's insurance and secure a policy before closing.

But how do you get homeowner's insurance?

How to Quote a Homeowner's Policy

As a licensed insurance agent, I can tell you there are some very common things that come up with quoting a home insurance policy. The first question is to determine if you actually need a homeowner's policy.

A condo policy is written for homes that you own the inside, but do not insure damages to the roof or siding. That portion is often overseen by the Condo Association. Another situation is insuring a home that tenants rent from you. These do not fall under standard homeowner policies, and instead are referred to as a Landlord Policy or a Dwelling Fire Policy. For more information on those click here: Condo or Landlord.

Once you have determined you need a homeowner policy, there will be questions to answer. The top 5 questions people run into when getting a home quote are:

What is the age of your roof?

The roof is the first line of defense in the case of a disaster, and is one of the biggest considerations when quoting for a home. Most insurers prefer roofs under 5 years old, that have a 30 year life expectancy. As the roof ages, the cost of insurance can increase. The reason for this, is because insurance companies assess the risk of the roof. Newer roofs are less likely to be worn, damaged, or have problems. As time goes on however, the wear and tear and breakdown of materials can result in damage like leaks, or are less likely to withstand a large storm. This increases the chance of a claim. The material of the roof is also often important, like the distinction of architectural shingles or composition shingles. Knowing this can be helpful in the quote.

What type of plumbing do you have?

While not all insurance companies consider this, plumbing does sometimes come up in homeowner quote. Polybutylene plumbing from 1970-1990 time frame can be concerning for insurance companies, as they are more likely to fail. If it is feasible, having this replaced is preferred from an insurance perspective. Another less preferred plumbing is galvanized steel, as they tend to be in older homes and are more likely to corrode or burst. The age of plumbing is also important to know, because a newer system will be rated much differently than an older one.

What type of heating is in the home?

Similar to plumbing, the age of the heating system can be beneficial to know. The type of heating is also considered, as oil tank heating can pose a different type of risk than an electric heating or gas heating. This also is important to list to allow the insurance to properly account for the cost of rebuilding these systems.

Has the electric box been updated?

The electric breaker box is indicative of a safe electrical system in the home. Many breaker boxes come with a label or sticker with the year it was installed included. If this information is not included, reach out to the realtor or the permitting department of the city your home is in, to find the year it was installed. If you do not have a breaker box, some insurance companies are still willing to take on older electrical systems without a replacement being needed.

What is your mortgagee clause?

The mortgagee clause is the information needed to bill the escrow for your insurance. This is different than the lender contact information, and often has specific terminology. The loan number is also needed to make sure the bill goes towards the right account. If you have a bigger name loan company, the mortgagee clause may be listed on this site: Mortgagee Clause List - ISAOA / ATIMA Address for Insurance.

Mortgagee clause information typically has ISAOA or ATIMA in the name. These stand for:

Its Successors and/or Assigns - This allows the original lender to sell the loan in the secondary mortgage market while ensuring the new holder of the loan is also protected by the insurance.

As Their Interests May Appear - ensures that any entity with a financial interest in the property is covered by the insurance policy, not just the homeowner

Having the most accurate information prevents the price changing if a company does an inspection of the property, and it makes sure you are adequately insured for damages that allow you to rebuild the home in its entirety if it was totally destroyed.

Self-Pay

When escrow is not the preferred option to pay homeowner insurance, or you no longer have a mortgage, direct payment is available. While monthly payments are typically an option, paying in full can sometimes save you money. If you still have a mortgage, but you pay directly to the insurance company, the mortgage lender still needs to be listed on the insurance policy, as they still have vested interest in the property.

What is Included in a Homeowner's Policy

Coverage for the home and your personal items is what differentiates it from other types of property policies. Different categories of coverage, cover different portions of your property and self. A homeowner policy always has the following major components:

Coverage A: Dwelling

This provided coverage for the dwelling, or structure, of the home. It is the total amount you will get if the home is completely destroyed. It does not take into account the land, or the market value. Instead it looks solely at the materials used in the home, the labor it would cost to rebuild it, and the roof.

Coverage B: Other Structures

This coverage is for structures detached from the home like a shed, a fence, a detached garage, or a pool. Solar panels can sometimes be covered under this, however each company decides how they are covered. Ones attached to the roof are typically under Coverage A, as they are attached to the structure.

Coverage C: Personal Property

This coverage is for your personal belongings inside the home like furniture, clothing, TVs, kitchen items, and more. There are limits on certain items like jewelry, guns, and furs along with other higher value items. If you have specific higher value items, a scheduled personal property policy may be beneficial.

Coverage D: Loss of Use/ Additional Living Expenses

This coverage is for living expenses, if you are displaced from the home while it is being repaired due to a covered loss.

Coverage E: Personal Liability

This coverage is for liability claims that are filed against you. If a person is injured on your property, or you are liable for damages to a person's property this coverage is used to help prevent a loss of assets, including your home.

Coverage F: Medical Payments to Others

This coverage is often used to avoid lawsuits, when medical expenses to a third party is at a lower amount. Typically policies provide $1,000, $3,000, and $5,000 amounts.

Deductibles

Wind/Hail: This deductible is the amount you will pay after a wind or hail loss, before insurance will pay out for the loss.

Other Perils/ Other Losses: This deductible is for things other than wind and hail, like fire, theft, vandalism, water damage, etc. Check your policy packet for exclusions (things not covered).

Hurricane: This deductible applies to specific states, and is only used in the case of damages stemming from a named storm. Typically this deductible applies 12 to 72 hours before the storm hits, and 12 to 24 hours after the storm passes. Your specific insurance company can explain when this would apply.

Setting Up the Escrow Payment

Typically, the escrow can be billed using the mortgagee clause and loan number. Either in the online quote, or when you are speaking with an agent, make sure to select the mortgage company as the one who is billed for the insurance. If you are having trouble online, calling the insurance company can help you verify it is set up correctly.

What Documents Do I Need?

After the homeowner policy is set up, a declaration page should be provided to you. This is a document that shows the coverages, property address, and name of the insured parties including the mortgage company. This is needed for closing to show insurance is secured.

Additional documents most escrow and mortgage lenders request are the invoice of the payment amount and a document called a Replacement Cost Estimator.

This document is the list of features being considered in the reconstruction of the home, based on the software used by the insurance company behind the scenes to determine the dwelling coverage. This is why it is important to have up to date, accurate information when filling out the insurance quote. Having incorrect information can cause a lender to decline the insurance, and you will have to quote again which can prolong the closing process.

While I am a licensed insurance agent in all 50 states, I do not gain any monetary compensation for providing this information. I do not advocate for any specific company, and have no investment in the purchase of an insurance policy following the review of this information. From experience, these are some of the most common questions and concerns I have seen when people buy a home. I strongly believe the best thing to be, is informed.

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