If you’re like us, there are two subjects that make your eyes glaze over: taxes and insurance. Sure, we learned a lot about the latter with the introduction of the ACA (Patient Protection and Affordable Care Act). We are now somewhat familiar with premiums, deductions, co-pays and the like. But, that’s health insurance. When you buy a home, you’ll be required to buy certain policies of a different type and some you may want to consider, depending on region. Let’s start with the basics of mandatory insurance—those policies you may be required to purchase before you close on the home.
The home purchase transaction doesn’t involve just the buyer and seller. Other entities, such as the lender, have interests to protect as well. And financial protection is what insurance is all about in the homebuying process. When an offer is accepted, the lender begins the process of determining whether the home is worth what you’ve promised to pay, whether you qualify for a mortgage and whether there are any problems with the home’s title. These problems are known by several nicknames, such as “clouds on the title” or “title defects.” Is the homeowner who is selling you the home actually the owner and does he or she have a legal right to sell it? Is there anyone else who may have a claim, full or partial, to the property? The title search will also include learning if there are liens against the home, outstanding judgments and unpaid taxes, among other issues. The title officer will perform a search of public records to find the answers and then issue a report known as the abstract of title or preliminary title report. Anything of a negative nature that will affect the lender will be brought to the seller’s attention so that it can be remedied. The lender will not issue funds to you to purchase until this is done. If the title is clean, on the other hand, the lender will go ahead with the loan, but will expect a title insurance policy to be issued in case anything crops up in the future. This policy is known as a lender’s policy and it’s required. What about protecting your interests as the Buyer? There is a separate policy to protect the homeowner, which is optional. A good and knowledgeable real estate agent can advise you on whether or not to purchase this policy.
Private mortgage insurance
Homebuyers have a love-hate relationship with private mortgage insurance, or the mortgage insurance premium in the case of the FHA-backed loan. It’s an additional expense not only at closing, but every month for the life of the loan (in many cases). Without it, however, borrowers who can’t come up with a 20% down payment would be unable to purchase a home. Learn more about private mortgage insurance from the Consumer Financial Protection Bureau and you’ll find additional information about FHA’s mortgage insurance premium online at hud.gov.
We’ve so far learned that title insurance protects the lender against future claims against the property, PMI (or MIP) protects them in case you default on the loan. What happens if the home burns down or experiences another calamity? This is where homeowners insurance enters the picture. The difference between this insurance and the two previously mentioned is that homeowners insurance also protects the homeowner. A standard policy is unlikely to cover the home for certain disasters, such as flood and earthquake. If the home is in a flood zone, however, you can purchase a separate insurance policy, under certain circumstances. “Flood insurance is available to anyone living in one of the 23,000 participating NFIP communities,” according to officials at FEMA.gov. NFIP is short for the National Flood Insurance Program. Government-backed loans typically require this insurance if you live in a flood zone. Yes, there is a lot to consider when purchasing a home. Do yourself a favor and consult with your insurance agent early in the process. He or she will help you determine which type of homeowners insurance is right for you and your lender. If you don't know an insurance agent, then work with a good realtor who knows different insurance agents from different insurance companies.