Buying homeowners insurance before closing

Prior to closing on a mortgage, your lender will require you to get a homeowners insurance policy and keep your home insured through the duration of the loan term.

Pat Howard 1600Fabio Faschi

Pat Howard & Fabio Faschi - PLCS, CLCS

Published April 17, 2020

KEY TAKEAWAYS

  • Prior to closing on a home mortgage, your lender will require that you purchase homeowners insurance

  • It is generally recommended that you start shopping around for homeowners insurance and comparing policies anywhere from three weeks to a month in advance of the closing date

  • Most lenders will require that you provide proof of homeowners insurance a minimum of three business days out from the closing date

  • Your lender will likely require that your first year’s homeowners insurance premium be paid up front

Before officially closing on a mortgage for your new home, your lender will provide a list of requirements and tasks that must be completed. Those steps include a title search, obtaining title insurance, and buying a homeowners insurance policy for the home. If your home is in an area deemed high risk according to Federal Emergency Management Agency flood maps, your lender could also require you to get flood insurance ahead of closing.

In this article:

Is homeowners insurance required to close on a home?

Unlike auto insurance, homeowners insurance isn’t required by law, but most mortgage lenders will require that you purchase a homeowners insurance policy before extending you a loan. Homeowners insurance isn’t required if you purchase the home outright, but you should get a policy anyway to protect against costly perils like wind and fire damage.

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Does your homeowners insurance policy need to meet any requirements?

Yes, your mortgage company will likely send you a notice weeks out from closing requiring that you purchase “hazard insurance” — meaning a homeowners insurance policy — for the home. The notice will include a list of minimum requirements that the policy must meet, which typically include:

Scope of coverage requirements

Your lender will require a policy that covers, at minimum, fire, windstorms, hurricanes, and hail — these perils are covered by most standard homeowners insurance policies

Coverage amount requirements

Your lender will require that you get enough homeowners insurance to cover 100% of the home’s replacement, or rebuild cost. Keep in mind that this number will be different than its market value or purchase price. The replacement cost is generally calculated by the insurance company, but you could receive a more accurate estimate by getting a proper rebuild appraisal of the home or consulting with local construction companies.

A notice to the lender

Your lender will also require that the policy have a mortgagee clause with the stipulation that coverage can’t be canceled without a minimum of 30 days prior written notice to the lender, and without a disclaimer for the insurer to assume liability if it fails to give written notice

Deductible

Your lender may have deductible requirements if the policy includes special percentage deductibles for perils like wind and hail or hurricanes — it could stipulate that the deductible can’t exceed a certain amount, like 10%

Proof of coverage

You’ll need proof of insurance coverage prior to closing; that could be your policy declarations page, a certificate of insurance, or an insurance binder (a temporary policy).

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Most mortgage lenders will require evidence of your insurance policy at least three business days prior to closing, and it’s not uncommon for lenders to request this documentation as early as 15 days prior to closing

- Fabio Faschi, property and casualty lead at Policygenius

How soon before closing should you get homeowners insurance?

Although you don’t own the home before closing, you should start to shop around and compare policies about three weeks out from the closing date. Most mortgage companies require proof of homeowners insurance — also referred to as an insurance binder — anywhere in the days and in some cases, weeks ahead of closing.

“It’s never too early in the process to consider your home insurance options for a new home purchase or refinance, but most mortgage lenders will require evidence of your insurance policy at least three business days prior to closing, and it’s not uncommon for lenders to request this documentation as early as 15 days prior to closing,” said Fabio Faschi, property and casualty lead at Policygenius. “To make sure you have time to properly assess your needs and requirements, I would generally advise comparing your options at least 3 weeks prior to closing.”

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 weeks out from start date.

Is the first year’s homeowners insurance premium paid prior to closing?

It’s very common for banks to require that you pay for your first year of homeowners insurance up front, either before closing or as part of your closing costs, but that’s not necessarily a bad thing. Paying for homeowners insurance up front is typically far cheaper than month-to-month payments.

If you put down less than 20% on the home, your lender will likely require that you make your mortgage payments through an escrow account — these monthly payments may include the mortgage payments itself, property taxes, private mortgage insurance, and homeowners insurance. An escrow account may be the better option if you’d rather pay for homeowners insurance in smaller, periodic installments.