First Time Home Buyers Insurance Guide 2024 (2024)

First-time home buyers have many considerations when shopping for a new home, including finding the best neighborhood and a house at a reasonable price.

While budget and location are important, don’t forget about finding the best homeowners insurance policy. There are several factors to consider and know about home insurance.

Mortgage Lenders Usually Require Home Insurance

For homebuyers who take out a mortgage, the bank or financial institution will likely require homeowners insurance, since they must protect their investment. For example, if your home were destroyed by a fire, homeowners insurance would help to rebuild it (up to your policy limits).

Homeowners insurance companies often create an escrow account, which pays your home insurance costs and property taxes. Mortgage companies collect money for the escrow account through your monthly mortgage payments. An escrow can be advantageous because it gives you fewer bills to worry about.

Some lenders require a mortgage escrow account for homeowners insurance and property taxes. For example, if you put less than 20% down on the home sale, your lender might require an escrow. If you put more than 20% down, you may have the option to lump your home insurance into your mortgage payments.

If you find a lender that allows you to forgo an escrow account, they may charge a higher interest rate for the arrangement. You’ll still be required to make home insurance and property tax payments on your own. Some homeowners prefer this option because it can allow for more financial flexibility, such as investing money in an interest-bearing account until it’s due.

If your lender does not require a mortgage escrow, they might require you to pay the annual homeowners insurance premium upfront. If the lender allows you to pay on a quarterly or monthly basis, your insurance company might charge a small installment fee.

Navigating The Home Insurance Shopping Process

Homeowners insurance covers your house structure (the “dwelling”) and belongings (the “contents”) from problems like fires, lightning, tornadoes, explosions, vandalism and theft. If you’re a first-time homebuyer, you might be unfamiliar with how to buy homeowners insurance and how to determine the right amount of coverage. To help streamline your homeowners insurance shopping process, here are steps to follow.

Understand What Homeowners Insurance Covers

As a new homeowner, you’ll want to know what homeowners insurance covers. A standard homeowners insurance policy includes:

• Dwelling: Dwelling coverage pays to rebuild your house if it’s damaged by any cause, except problems that are specifically excluded, such as floods.
• Personal belongings: Personal property coverage pays to replace or repair your personal belongings after a problem covered by the policy, like theft or fire. Some policies cover belongings for 16 common problems but you can typically upgrade a policy to cover any problem—except those named as exclusions. This gives you broader coverage for your belongings.
• Liability insurance: Personal liability insurance pays for medical expenses and property damage your household members cause to others. For example, liability insurance can pay out if your dog bites someone or your child accidentally knocks a baseball through a neighbor’s window. Liability insurance also pays for a legal defense if you get sued over an injury or damage. Liability limits on homeowners insurance policies typically start at $100,000, but consider upping it to $300,000 or $500,000. Liability insurance should cover what you can lose in a lawsuit.
• Medical payments to others: Medical payments to others coverage pays for minor injuries if a guest is hurt on your property. This coverage is generally in small amounts between $1,000 and $5,000 and is intended to pay for small injuries, without regard to fault.

Additional living expenses coverage: Additional living expenses coverage pays extra “loss of use” expenses, such as hotel bills, meals and other costs (like laundry services or pet boarding) if you can’t live in your home temporarily because of a problem covered by the policy, like a tornado or fire.

Compare Home Insurance Companies

It’s smart to pick a homeowners insurance company as soon as you know the house you’re buying.

“This gives your insurer enough time to get all of the paperwork in order before the closing,” says Bob Buckel, vice president of product management at Erie Insurance.

When you’re comparing homeowners insurance companies, a few things to consider include:

Company quality. Ratings like Forbes Advisor’s picks for the best home insurance companies can help you zero in on insurers with a combination of competitive rates and wide coverage options.

Financial stability. Check out a company’s financial strength ratings from Standard & Poor’s or AM Best. These provide an assessment of the insurance company’s ability to pay claims in the future. Many insurers post their financial strength ratings on their websites.

It’s a good idea to check on a company’s financial health before you buy a policy. If your insurance company goes out of business, your policy could be switched to another company or managed by the state guaranty association (which could cap the amount of claims they will pay).

Identify the Right Amount of Coverage

When you’re buying a policy, your insurance company will evaluate the characteristics of your home (such as the structure and building materials) to estimate the cost of rebuilding it. They’ll recommend an appropriate amount of coverage for the dwelling.

Things to consider:

Can you get extended coverage in case the home is destroyed? Extended and guaranteed replacement cost coverage are two options that can provide additional money for rebuilding above your dwelling coverage limit.

Buckel at Erie Insurance recommends considering guaranteed replacement cost coverage, which pays the full cost to rebuild a house, no matter what amount is listed on your policy.

“For example, if your policy is for $200,000 but the builder says it will cost $250,000 to rebuild your home, the insurance company will pay the full amount as long as you have the benefit in your policy, ” says Buckel.

Extended replacement cost is similar but sets the additional maximum amount, such as 25% extra. Not all home insurers offer these options.

Do you have enough contents coverage for all of your belongings? Consider your furniture, rugs, clothes, jewelry, musical instruments, electronics, artwork, kitchenware and other items. A good way to do this is by creating a home inventory.

Most policies cover contents at an amount that’s 50% to 70% of the dwelling coverage. For example, if your house is insured for $200,000 and your personal property coverage is set at 50%, you would have $100,000 in personal property coverage.

You can change that coverage level. The amount of coverage you choose will depend on the type of personal belongings you have and what the items would cost to replace.

Insurance Options Beyond Default Limits

You may want to rejigger coverage to either fill in gaps or increase coverage limits.

Natural disaster insurance.If you live in an area that’s prone to flooding, you may want flood insurance. In fact, a mortgage lender might require you to have it if you live in a high-risk area for flooding.

There’s also sinkholecoverage (good for Floridians) and earthquake insurance(a consideration for Californians).

Sometimes you’ll need a combination of insurance types to be fully protected. For example, tidal waves can often follow earthquakes, but earthquake insurance doesn’t cover flood damage.

Sewer backup. If a sewer backs up or your sump pump fails, water backup and sump pump overflow coverage pay for the cost of water damage. This insurance type might also cover water damage caused by tree roots growing in a sewer line.

Umbrella insurance.While the liability coverage within a homeowners policy is a good start, it still might not be enough. If your insurance company limits the amount of liability coverage you can buy and your assets exceed that amount, you may want to purchase umbrella insuranceforadditional liability coverage.

You can typically purchase about $1 to $2 million dollars of umbrella insurance for about $380, according to Trusted Choice, an insurance group for independent agents.

How To Evaluate a Home Insurance Policy

• Understand coverage levels. Know the maximum amounts that will be paid for your dwelling, belongings, loss of use and liability lawsuits against you—to avoid bad surprises later.
• Choose a deductible. A home insurance deductible is the amount deducted from an insurance claim check. You can save money by raising the deductible, if you’re comfortable with paying more if you have a claim. Be aware that some policies have deductibles tied to specific damage, such as a special deductible in some states for wind damage.
• Compare rates. Get homeowners insurance quotes from a few different companies. If you already have car insurance, start with that company—you can likely snag a multi-line discount for insuring your vehicles and house with the same company.

Homeowners Insurance For New Homebuyers FAQ