Before you’re able to officially close on a mortgage, you'll need to conduct a title search, establish cash for closing costs, and buy a homeowners insurance policy.
Do I need homeowners insurance before closing?
Yes, while homeowners insurance is not required by law, most mortgage lenders require it in exchange for extending you a home loan. If your home is in a high-risk flood zone, your lender could also require you to get flood insurance.
Once you have a policy in place, your mortgage lender will require you to provide proof. In order to do that, you’ll need a copy of your home insurance binder, which is a one-page document that provides temporary evidence of coverage. If you already have your policy declarations by the time your closing date rolls around, that works as proof of insurance as well.
→ Read our home insurance tips for first-time buyers
When do lenders require you to purchase homeowners insurance?
Most mortgage lenders require proof of homeowners insurance anywhere from a few days to two weeks before your closing date. But you should start shopping about a month out from closing. Giving yourself an extra few weeks not only ensures that you don’t delay your closing date, but it also gives you time to shop around and properly evaluate your coverage options. Purchasing homeowners insurance weeks in advance can also save you money on homeowners insurance premiums. Many companies will reward forward-thinking applicants with an early bird discount for purchasing coverage a few weeks before the policy’s effective date.
When should homeowners insurance be purchased?
Your lender will likely require proof of insurance a few days or weeks before your closing date on the home. That said, it’s a good idea to shop around for insurance around a month before closing — that gives you time to compare different insurers to make sure you’re getting the best deal.
How much homeowners insurance do mortgage lenders require?
Once your mortgage is approved, your lender will send you a notice requesting evidence of home insurance. The notice will include minimum requirements the policy must meet, including:
Scope of coverage requirements
Your mortgage lender will likely require you to purchase a homeowners insurance policy that covers, at minimum, the perils of fire, wind, and theft — you’ll find these covered under most standard homeowners insurance policies.
Coverage amount requirements
You’ll need enough homeowners insurance to cover 100% of the home’s replacement value, or the cost to rebuild it from the ground up. This number is different from the home’s market value or purchase price.
Replacement cost is generally calculated by the insurance company, but you could receive a more accurate estimate by getting a proper replacement cost appraisal of the home or consulting with a local contractor.
→ Learn about 4 ways to estimate the replacement cost of your home
A notice to the lender
Your policy also may need to include a mortgagee clause. This provides assurance that your policy can’t be canceled without a minimum of 30 days written notice to your lender.
Proof of coverage
As mentioned earlier, you’ll need proof of insurance coverage prior to closing. This could be your:
Certificate of insurance
Paying for homeowners insurance at closing
Your mortgage lender will likely require you to pay for a year’s worth of homeowners insurance up front — either before or at closing. But this isn’t necessarily a bad thing; homeowners insurance is generally more expensive when it’s paid monthly.
If you put down less than 20% on the home, your lender will likely require that you pay your mortgage and other homeownership costs via an escrow account. Under escrow terms, your property taxes, private mortgage insurance, and homeowners insurance are added to your mortgage payment.
Frequently asked questions
Why do you prepay for homeowners insurance?
Some mortgage lenders may require you to prepay for homeowners insurance. Lenders do this for the same reason they require you to purchase homeowners insurance in the first place — to protect their financial investment in your home. Keep in mind that there’s a bonus to prepaying for insurance — many insurance companies will give you a discount for doing so.
What is the first step when buying home insurance?
The first step of buying home insurance is learning how much coverage you need. You’ll need to determine what your home’s replacement cost is, which is the amount it would cost to rebuild your home from the ground up with similar construction materials. You’ll also need to consider how much personal property coverage and personal liability coverage you need. Check out our guide to shopping for home insurance to learn all of the steps.
