Do you need a homeowners policy in force to close on a house?

02 May
Real Estate closing and homeowners insurance coverage.

One of the most important things that you will have to arrange before the big day is a homeowners insurance policy.

The day that you close on a new house is unforgettable. It’s always exciting and a bit nerve wracking. At the end of the day you will get the keys to your dream house, but before that happens there are tons of papers to initial and sign as well as dozens of things to arrange.

One of the most important things that you will have to arrange before the big day is a homeowners insurance policy. Unless you are paying cash in full and have no interest in having your house being rebuilt in the event it is destroyed by fire, flood or earthquake, homeowners insurance is a must for every homebuyer at closing time.

If you are taking out a mortgage on the house, your lender is going to require you have a policy in force on closing day. The bank is loaning the money, and is the true owner until you pay the mortgage off so they want to be assured that their financial stake in the home is covered. In the event that the house is destroyed the bank or mortgage company will want to be reimbursed the money they are out and homeowners insurance is the only way to guarantee it.

If you fail to show up with proof of a policy there is a good chance the deal will be cancelled or rescheduled to a future date. If rescheduled you will have to provide proof of coverage before the closing can proceed. In some cases, the lender may purchase a policy for you, and add it into your mortgage payment. Letting your bank pick a policy is never a good idea as they will only be concerned about their specific needs in a policy, not yours.

While requirements vary, for a single family home, many lenders will require you to purchase a policy and pay the first years premium in full and bring a copy of the binder to the closing. In some cases, your insurer will send the copy directly to the title officer handling the closing.

The policy must name the lender as an additional loss payee. Banks and mortgage companies can be exacting in regards to how they are named on the policy. It is often a good idea to have your loan officer send you the exact language they would like included on the policy and forward that information to your insurer.

If your new pad is a condo instead of a single-family home, you will still have to provide proof of coverage. Condos and apartments are a bit different than a stand-alone home. The condominium’s master policy will cover rebuilding the building up to the existing walls of your unit. Everything inside of those walls, including kitchen cabinets, appliances, and all of your personal belongings are not covered by the master policy.

An HO-6 policy protects condo owners and offers coverage for everything within the walls of their condo. Depending on the lender, they will require a copy of both the master policy and an HO-6 coverage, while other insurers may only need to see the master policy.

Even though your bank will require a homeowners policy, protecting your home and belongings is vital to your financial well-being. While we all believe that it will never happen to us, you never know when disaster is going to strike. Homeowners insurance provides protection and peace of mind.

Finally, depending on where your new home is located, you may need to provide proof of additional coverages:

Wind Insurance – Frequent hurricane or tornado activity in the area means you will have to purchase a wind insurance rider. If you think it is a possibility, ask your lender and bring proof of coverage to the closing.

Flood Insurance – Flood damage is not covered by a standard homeowners policy. If your house is within a flood plain, your lender will absolutely require flood insurance. Again, check with your lender if flood coverage is necessary.

Earthquake Insurance – Earthquake insurance will be required in states where earthquakes are common. Many states have a state pooled fund that sells earthquake coverage. When purchasing a policy be sure you find a plan that has a reasonable deductible.

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