The first time you purchase a home, it is likely that you will be introduced to a couple of types of insurances that you may not be familiar with. Most of us have heard of homeowner’s insurance and flood insurance, but mortgage insurance and title insurance are not as widely understood. In this two-part series, I will provide a brief overview of the purpose of each type of insurance.
Homeowners insurance protects you (and the lender) against damages to the home itself, your property within the home, and your liability for accidents on the property. The terms of the coverage may vary, of course, depending on the amount of coverage, the deductible, and so on. Your loan approval will be conditioned on meeting certain minimum coverage requirements, such as ensuring that the policy would provide at least the replacement value of the home in the event of a total loss, for example.
You may choose whatever insurance agent and company you wish to do business with. Many people begin with the company that currently provides their car insurance and, in fact, this can be beneficial as most insurers will provide a discount to customers that bundle both types of insurances. These discounts can vary widely from one company to the next so it may not be a bad idea to use the opportunity to shop both policies around to multiple companies.
Just as it sounds, flood insurance provides coverage for damage caused by flooding. Homeowners insurance may cover some instances or resulting effects of water damage, but it generally does not cover flood damage.
As part of the loan approval process, we will check to see if the home you are purchasing is in a designated high-risk area for flooding. If it is, flood insurance will be required. If it is not, it might be a good idea to consider obtaining a flood insurance policy anyway. Flood insurance can be obtained through most insurance agents, but it is actually provided by the federal government’s National Flood Insurance Program.
So why buy flood insurance if you are not in a high-risk area? One reason is because it is relatively inexpensive in low-risk areas and the point of insurance is to protect against unexpected circumstances. Another good reason is that, per a FEMA report, more than 20 percent of claims come from moderate- to low-risk areas.
I cannot emphasize enough how important it is for you to ask questions and read your homeowner’s insurance policy, particularly when it comes to water damage and the effects of water damage, such as drywall damage and mold.
Check out part 2 of this series for several other insurance products associated with buying and owning a home.