Home insurance for first-time homebuyers: What you need to know

If you’re a first time homebuyer, make sure you begin shopping for home insurance well in advance of your closing date. This will give you enough time to evaluate your coverage needs and compare quotes with multiple companies.

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If you plan on taking out a mortgage on a home, your lender will require homeowners insurance to protect the property against perils like house fires and weather-related damage. Once you have a policy, you’ll then provide your lender with proof of coverage before being approved for the mortgage.

If you’re a first-time homebuyer, the process of buying homeowners insurance may seem complicated. On top of that, you have approximately a bajillion other things to worry about during the mortgage approval process, so it’s understandable if you choose to settle on whatever homeowners insurance your loan specialist recommends and get on with it.

While that is certainly one way to do it, consider taking the lead in your shopping process and comparing quotes far in advance of your closing date. Setting up your homeowners insurance early on not only gives you more time to establish your coverage needs and compares policies, but it will also save you money.

Key Takeaways

  • If you’re taking out a mortgage on your new home, you’ll need to get homeowners insurance prior to your closing date

  • First-time homebuyers should start shopping for coverage at least 30 days prior to closing

  • When setting up your insurance policy, make sure the insurance value on your home is reflective of its replacement cost, not its market value

  • Consider bundling your home and car insurance policies for lower rates

Tip 1: Shop for homeowners insurance well in advance of your closing date

It’s best to start shopping at least 30 days prior to closing on a home loan.

Most mortgage lenders require proof of homeowners insurance — or a home insurance binder — at least three days out from your closing date, but it’s not uncommon for lenders to request policy documentation as early as 15 days prior to closing.

Giving yourself a few extra weeks to shop around for coverage not only ensures you won’t delay your closing date, but it also gives you more time to evaluate and determine your coverage needs. Knowing exactly how much insurance you need on your home gives you a more accurate apples-to-apples quote comparison.

Setting up your policy ahead of time can also earn you a generous policy discount.

“It’s always a good idea to get ahead of shopping your home insurance,” says Fabio Faschi, property and casualty team lead here at Policygenius. “As an incentive to think ahead, many insurers provide an early quote discount for those who set up their coverage around a week prior to its start date.”

→ Learn more about how to buy homeowners insurance

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Tip 2: Insure the home at its replacement cost, not market value

One common misconception shared by many first-time homebuyers is that you only need enough homeowners insurance to cover the value of your mortgage or the home’s market value, but basing your home’s insurance amount on those numbers will often leave your house either over- or underinsured.

What you’re actually looking for is the home’s replacement cost, or the amount it’d cost to rebuild the home at today’s cost of labor and construction. The replacement cost doesn’t include the cost of land, so your home’s replacement cost is often lower than its market value. Your homeowners insurance company will generate an estimate of your home’s replacement cost when you shop for a policy, but you can also calculate it yourself to ensure you’re getting the right amount of coverage.

“Your home's replacement cost will likely not match your purchase price — don't always expect your insurance policy to match the price for which you're buying your home,” says Faschi. “It could be close, but it could also easily be higher or lower.”

Tip 3: If you have a car, consider bundling your home and auto insurance

There are a few significant benefits to bundling your home and auto insurance that are worth considering: Bundling makes shopping for insurance easy, it gives you the convenience of only having to pay one bill (and remember one account login), and it often results in generous discounts. Policygenius customers have saved an average of 30% by combining their home and car insurance policies with a single company.

When shopping for home insurance, consider any other lines of property insurance that you already have or that you’re curious about. Are you already paying more than you’d like for car or boat insurance? Do you have additional assets that need protection with a personal umbrella policy? Then consider maximizing your savings by getting all of your coverage through one company.

→ Learn more about bundling home and auto insurance

Tip 4: Determine how much you’re willing to pay out of pocket vs using your home insurance

When finalizing the details of your home insurance policy, you’ll need to set a policy deductible which is the lump sum amount you’re responsible for paying before your insurance company pays for the remainder of a loss. A higher policy deductible can lower your homeowners insurance rates, but it also means you’ll be paying more in the event you need to file a claim.

When setting your deductible, you’ll have to determine how much you’re okay with paying out of pocket.

Can you afford to cover losses less than a couple thousand dollars? Do you plan on only using home insurance to cover expensive property damage or break-ins? Then you’ll probably be comfortable setting your deductible on the higher end, like at $2,500 if that’s offered by your insurance company.

But if you’re concerned about your ability to cover smaller losses out of pocket, you might want to stick with the standard $500 or $1,000 deductible. Just bear in mind that filing frequent claims can often cause your homeowners insurance to go up or lead to nonrenewal, which is why it’s often smarter to only use your coverage for significant losses.

“Setting your deductible is answering the basic question of what kind of claims you're okay with paying out of pocket vs tapping into your insurance,” says Faschi. “Consider the different implications of opting for a $500 deductible vs a $5000 deductible and what it would mean to your financials.”

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