We’ve seen this film several times: the first-time home buyer is thrilled with the chase of finding his dream home and puts all his strength and focus on this challenging and time-consuming process. When he finally finds an ideal house and comes across yet another complex process – that of acquiring a Homeowner’s Insurance – he just says: “Ah, whatever, whichever; just let’s get this over with so I can enter my new home and enjoy it”. But spoiler alert: the ending to this film is a sad one.
If you are a first-time home buyer in search of a happy ending to your story: here’s a guide to help you with some of the most important aspects of home insurance.
Not if you have the money to pay for the house upfront, without the aid of a mortgage. Home insurance does not work in the same way as car insurance, which every state (except New Hampshire) demands in order to allow your car to be out on the streets. Like the name says, it’s homeowner’s insurance. It exists so the homeowners can protect its assets. If he doesn’t want to: fine; it’s his loss, literally.
However, since the vast majority of first-time home buyers do rely on financial institutions - and those financial institutions require protection to their investments - albeit not legally mandatory, it’s improbable (not to say impossible) for a first-time home buyer to refrain from enrolling in homeowner’s insurance. The thinking behind this is pretty clear: if the homeowner doesn’t pay the mortgage, the lender gets a foreclosure order and puts the house up for a foreclosure auction, right? If the house is trashed, filled with structural problems, the lender will recover less of his loss. So they usually require, during closing, that the home buyer (not only the first-timers) pay for it monthly, together with the mortgage, and, sometimes, they’ll even ask for the home buyer to pay for the whole first year in advance.
So, homeowner’s insurance: not mandatory, just highly recommended.
That is up to you and how much you want to spend. Since prices get influenced by a lot of aspects – and we will get into this later – it’s important to first understand the “what” before the “how much”.
There are 4 standard areas that homeowner’s insurance can cover.
Dwelling insurance – is the one most first-time home buyers usually associate to when they think of home insurance. It’s the basic protection of the house itself, the materials and construction that form the housing structure. But this is the literally the surface of a homeowner’s insurance.
Personal property insurance – the objects inside your house are another asset that requires a different kind of home insurance coverage. You may have structure coverage, but no possessions coverage because you deemed them to be worthless. But it’s important to consider that this is not only to protect expensive art. In the case of a flood or an electrical surge, you may have a general appliance fail, and, although individually they are not expensive, the amount adds up when you have to get a new fridge, a new oven, new TVs, computers…
Liability Insurance – While the first two coverages insure damages to your assets, this one is focused on the homeowner himself. Say someone got hurt in your house; this home insurance coverage protects you from possible lawsuits. Most homeowners don’t give this homeowner’s insurance coverage its due importance, but remember: this is America; people sue people as much as they say “hello” to their neighbors. And the lawsuit doesn’t even have to be related to an “Act of God” or anything. It can come from a Mailman who tripped on the front door while delivering a package. Or a parent whose child ran across a glass door on a playdate or slipped on a trampoline and hurt himself. Liability will cover legal and medical charges and, since those are usually quite costly, you should refrain from the $100,000 in liability coverage that most people choose. A $300,000 (or higher) in liability is less likely to get eaten so fast by all those bills.
Additional Living Expense Insurance – when your house becomes unlivable, the living expenses coverage kicks in. It’s there to help you with any extraordinary expenses you have to deal with in the event your house (or a vital part of it, like the kitchen) is destroyed. If you have to sleep at a hotel (or rent an apartment) until your house is livable again, if your kitchen is unusable and you have to eat out… this will pay for the difference. It calculates what you used to spend and, if now, because you don’t have your home available, the costs are higher, the home insurance will pay for the extra costs. Example: say your kids used to walk to school, but, now that you’re staying across town in a hotel while the house gets repaired, you need to drive them, right? You use to drive 3 miles to go to work, but now, with all that driving, your car is rolling 15 miles a day. When paying for gas, you’ll continue to pay for the 3 miles a day you used to; the homeowner’s insurance policy will cover the exceeding mileage.
Lastly, it’s a common mistake to think that homeowner’s insurance cover Flood damages. Although wind damages caused by hurricanes are usually covered, there’s a specific Flood Insurance. Insurance companies decided to have a separate policy just to take care of flood as their damage can get so comprehensible and they became so recurrent with climate change - independently of the property’s proximity to the coast - it just made more sense to have a different one. We highly recommend you getting flood insurance to your house independently from where you live.
Even first-time home buyers know that a straightforward answer to this question does not exist because there are A LOT of factors that go into calculating how much will your homeowner’s insurance cost.
Your Deductible is one of them. The higher the deductible, the lower the premium. Also, the property itself comes into play when deciding the price of the home insurance policy. Not the market value, but the Replacement Cost. Since the houses are bound to get rebuilt, the more expensive (or rare) they are, the more expensive the homeowner’s insurance. Old houses – because they are likely to have more problems than newer ones – also raises the price of the policy.
But moving away from the house itself, there are other factors that weigh in this equation. The location is one of them: a house in a dangerous neighborhood is more likely to be vandalized and to receive the unwanted visit of a burglar, right? And a coastal property is more likely to be affected by wind damages, erosion problems and, sometimes, even flooding from high tide. And a cabin near the forest is more likely to get caught by wildfire. So, you see… to every location, there is always a peril. But some can get combined and that will make your premium go up.
Finally, there are factors directly connected with the person requesting home insurance that influence the cost of homeowner’s insurance: its credit score, its age and its history of claims. Those are usually determinant with first-time home buyer as they are generally young people still building credit and insurers want to deal with people with a long history of employment and financial responsibilities track record. In the case of its claims history; since, like the name explicates, they are first-time home buyers, it is safe to say that all debutant are likely to pay more expensive premiums than normal.
Those are just the basics of home insurance for first-time buyers. As we said before, you can’t (and - even more importantly - you shouldn’t) escape homeowner’s insurance, but you can make it easier on your pocket. Check our article on How to reduce your home insurance policy and find out! And once you’re ready to go down that road, find a real estate agent to help you and connect you with an insurance agent that can guide you through all types of homeowner’s insurance.