Essential types of insurance for homebuyers

Your future home could likely be your most valuable asset, so insurance is a great way to protect that asset. During the homebuying process, your lender will help you understand which types of insurance are required versus optional. Below, we’ll go into detail about the four most common types of home-related insurance: homeowners insurance, flood insurance, private mortgage insurance, and title insurance.

Most lenders require homebuyers to secure homeowners insurance before they close. Details of everything covered can vary, but homeowners insurance generally covers the costs of your belongings, as well as repairs due to fire, snow, wind, hail, frozen plumbing, vandalism, or theft. It might also cover the costs of a temporary place to stay while your home is being repaired.

Some types of damage related to floods or earthquakes may not be covered unless you specifically add these to your policy. If the home you’re buying is located in a flood- or earthquake-prone zone, you may need to secure additional coverage specific to floods and earthquakes.

Just like it sounds, flood insurance covers damage to your home due to flooding. It's also only required if your home is in a Special Flood Hazard Area, which is determined by the Federal Emergency Management Agency (FEMA). Most lenders add your flood insurance payment to your monthly mortgage.

Private mortgage insurance (PMI) is typically required if you’re buying your home with a conventional loan but are making a down payment of less than 20% of the purchase price.

PMI protects the lender, so they are more willing to extend loans to people without the standard 20% down payment. (Remember, there may be other ways to get a home loan with a down payment amount of less than 20%.)

Removing PMI

If you can show that your home has increased in value, or you have paid down your loan balance enough, you may be able to request that your lender remove the PMI from your loan. Typically, you will need to have 20% equity (the difference between the market value of your home and what you owe on your mortgage) in your home. Depending on your home’s property type, your lender may be required to end your PMI obligation after a certain amount of time. Additional factors, such as the age of the loan, your payment history, an increase in your property value, or evidence of significant home improvements may impact your eligibility to remove PMI. Talk to a mortgage consultant to discuss your options and any associated costs.

During the homebuying process, buyers are also required to purchase title insurance. Title insurance protects you and your mortgage lender against possible financial losses that could occur if an outside party tries to claim they own the property you’re purchasing, or if there are unresolved liens on the property.

The title insurance process takes place before you finish purchasing a home. Instead of being collected and paid over time, title insurance is paid in full by the buyer when the loan closes. Coverage is issued for the amount equal to the loan until it’s repaid.