We quit searching high and low for a much-obsessed-over house buying guide. Because, unfortunately, one…
Now that you are researching home insurance binders, we bid you congratulations! You are most likely in the home stretch to get the keys to your dream home.
When you’re buying a brand-spanking-new house, worst-case scenarios are probably the furthest from your mind. And we get it! Nobody wants to spoil this period in your life. But this is precisely what insurance is all about: so you never have to worry or have these concerns.
If you’re a first-time home buyer researching mortgages, you will most likely read a lot about private mortgage insurance (PMI). However, if you’re thinking of the traditional kind of insurance, this is not what you might be expecting. PMI is just one kind of insurance. It protects the lender—not the borrower—if the down payment is less than twenty percent. If the borrower stops repaying the loan, the house gets foreclosed, and insurance covers the lender.
Homeowners insurance might be more of what you’re expecting. This is the kind of insurance that will actually benefit you and your property.
Of course, though, who wants to pay any additional cost? How does homeowners insurance help you, and why should you apply for it?
Today, let’s talk about how vital homeowners insurance is to you as a mortgage borrower. We’ll also discuss the steps you need to do to get homeowners insurance during the closing period of the home loan process.
What is an insurance binder for mortgage loans?
If you’re going to pay for insurance, it might as well be for something that will work for you. When you pay PMI, none of this money is returned even once you’ve fully paid your mortgage.
Unfortunately, for most mortgages, homeowners insurance is non-negotiable. You borrow a lot of money because you don’t have the funds needed to buy a home, and because houses cost a great deal, lenders want assurance that will lessen their risk. The more protected your house is, the safer their investment. The good news is a homeowner insurance policy will also protect you.
Homeowners Insurance Coverage Limits
If PMI helps make up for the loss of a mortgage lender when you default, homeowners insurance makes up for the loss incurred by damage to your property. If someone slips and falls in your house and decides to sue you, homeowners insurance can even help you with the legal costs. However, it doesn’t cover everything under the sun.
So if you have an unnecessary expense of this nature, you will most likely be covered by insurance. But there are a few conditions wherein the insurance company may not entertain you. For instance, damage caused by “acts” of God and war is usually excluded from your policy. You can decide to add them as “riders,” but this means additional costs. Still, it might be worth it, especially if you know that the area you will be living in is prone to these disasters. If hurricanes, tornados, or flooding are common in your state, getting these riders is a must.
If you already have auto insurance, you may already have experience making this kind of decision. Chances are, if you want to protect your car from damage, you’ll also want to safeguard your home from loss.
Homeowners Insurance Binder
When we say ‘binder,’ it sounds like it might mean a whole stack of documents, but this is far from the actual thing.
A homeowners insurance binder is a temporary proof of insurance. Usually, it will just be one piece of paper. It’s not yet your final contract, but it’s as good as a guarantee that the company will issue you a homeowners insurance policy once you have closed your mortgage and moved into your new home.
Why do you need an insurance binder?
1 – It is non-negotiable.
Until you fully repay your mortgage, you will only have partial equity in your home. The mortgage lender will continue to have a stake in it until the last day of your payment. So your house will act as one of their investments.
A requirement for your purchase to be eligible for a mortgage is the presence of an insurance policy. Without a home insurance binder on closing day, you won’t be able to close your mortgage.
2 – You can bundle it with existing insurance.
On the plus side, you are not obligated to choose an insurance provider partnered with the mortgage lender. In fact, they are not allowed to recommend a particular insurance agency. If you already have existing insurance services like auto insurance, you can go back to your insurance agent and request to get this bundled with a home insurance policy.
If you get a bundle, it will be cheaper this way, and you’ll just be continuing an existing relationship with an insurance company you already trust.
3 – The sooner you find an insurance company, the better.
It is recommended that you get a homeowners insurance policy as soon as you sign the purchase agreement. Why is this?
Before you finalize the mortgage and dot all the i’s, there will be a home inspection and appraisal, which the mortgage lender requires. If you get a government-insured mortgage, they are especially strict about these inspections, and the house will indeed go under much scrutiny.
If you’re already set on buying this house, most likely, you will buy it whatever issues are found during the inspection. Most homebuyers do some minor fixing up after they move in, anyway. But once these problems are identified, the possible rate that the insurance company will charge you will significantly go up to acknowledge the existing risks of the house.
So the earlier you can get a home insurance binder, the cheaper the policy will be for you.
4 – You have the freedom to choose the best offer.
Another benefit to moving fast on your insurance binder is you have more time to look for the best insurance company.
From the time you sign the purchase agreement to closing day, there is usually a 45 to a 60-day delay. It might seem long, but this represents a flurry of activity with all the paperwork you have to run, especially if you don’t have a mortgage broker.
These several weeks will give you ample time to talk to different independent agents and do your research so you know if you must add this rider, that rider, or not. Unfortunately, not all companies can offer you the same insurance policy, so you must determine which one will give you the most value for your hard-earned money.
How do you get a homeowners insurance binder?
We’ve established that you need an insurance binder for your mortgage. If you miss this step in the home buying process, you might unnecessarily delay closing.
We recommend that you start searching for an insurance agent even before settling on a home. Then, as you research your ideal lender, you can also look for a company that offers the most insurance coverage.
Once you have the purchase agreement, you can call the first insurance agent. To calculate the value of your policy, the agent will ask you a lengthy set of questions. It can take anywhere from twenty minutes to a full day before you can get an insurance binder. Unlike mortgage lenders, insurance companies do not necessarily require home inspections or appraisals unless the new property is located in rural areas that need surveying.
If you have no idea where to start, you can go online and enter the general area where you are interested in buying a house. It’s better to meet insurance agents in person rather than merely speak to them over the phone, so you can get to know your new partner more. You’ll be able to ask as many questions as the agent will ask of you, and you’ll get your hands on the insurance binder much faster.
Before you meet your insurance agent, we suggest bringing as much information about the house as possible. The agent will ask you details like how many bathrooms it has, how big its kitchen is, and more specific figures. If you don’t answer these correctly or don’t have the information at hand, it might cause a delay in getting your temporary contract.
Unlike PMI, you cannot avoid homeowners insurance no matter how much you pay as a down payment. This is because your insurance policy depends not on your mortgage payments but on the property’s value.
A homeowners insurance policy is a must to successfully purchase a house via a mortgage. You need to provide proof of an insurance policy by presenting a homeowners insurance binder at closing.
You have the freedom to avail this policy from an insurance company of your choice. So you can research a homeowners policy that will provide you with the insurance coverage you need. If your house gets damaged or you experience loss of property, this insurance policy can come to your rescue. However, there are limits to how much coverage you will be provided in cases of natural disasters or war. If you want to pay more money to add these as riders, it is up to you.
Unlike the underwriting process of a mortgage, there will be less documentation asked of you as you apply for a homeowners insurance binder. A home inspection is not required, but you will need to answer many questions as factually as possible.
Take note that depending on the insurance policy you get, insurance binders are only good for up to a maximum of ninety days from issuance. Sometimes, they can expire as early as one month. So make sure you receive a formal policy from your agent if the closing process extends beyond the average sixty days.
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