Same Name, So Many Types

Insurance … that covers a lot of area – from car insurance and liability insurance to health insurance and homeowner’s insurance.  There are a lot of insurance types out there and when you buy a house, there are a few you need to be familiar with.

My previous post discussed mortgage insurance.  This type of insurance may be required on your loan if you have less than 20% down with conventional financing or if you’re doing FHA financing.  It insures the lender in case you default and doesn’t cover you for anything.  Mortgage insurance is factored into your monthly house payment.

Flood insurance is another one that could possibly become something you need to understand.  Lenders will “pull” a FEMA (Federal Emergency Management Agency) flood certificate on all properties prior to financing them to confirm the house is not in a flood zone.  If it is in a flood zone, flood insurance will be required to be part of your house payment.

Title insurance is necessary for any loan that is being done in Minnesota.  There are two types of title insurance.  One is called lender’s title insurance which insures the lender in case any other liens come up against the property.  As lenders, we want to be in first lien position so if other liens arise, we are paid first.  Lender’s title insurance is paid by the buyer at the time of closing and the amount varies by title company, loan amount and purchase price.

The second title insurance out there is called owner’s title insurance and this would protect you.  It is optional and the cost is based on purchase price and loan amount, as well as the title company you’re using.  This is a one time fee paid by you at closing, so it’s not something that is “renewed” year after year.

Though you aren’t in a lien position, you may want to be protected if liens come up that weren’t incurred by you. When purchasing a home, one of the jobs of the title company is to search public records on the address you’re buying.  They want to make sure no liens exist so they can pass free and clear title to you.  If there are liens, the seller is responsible to pay these off at closing.  No one is perfect, so there could be liens out there that the title company doesn’t find as they may be improperly recorded at the county.  Liens follow the property address, not the person who incurred them.  So, when you go to sell or refinance and a new search is done, something could come up like this and you would either need to pay it off, go to court to fight the lien if it’s not yours or when you purchased, if you had bought the owner’s policy, you may be protected for instances like this.  Talking to a title company is the best way to learn more about the owner’s policy and their specific coverages.

Finally, there is homeowner’s insurance.  This is a little confusing because it actually is known by a few other names – hazard and property.  They all do the same thing – insure the property we will be lending on.  And lenders want to make sure the property is adequately insured.  The amount of coverage requirement will vary by lender and loan type so you will want to check with your lending institution.

Homeowner’s insurance is billed annually, and in many instances, will be part of your house payment depending on the loan type you’re doing and your down payment amount. It’s your responsibility to set up your annual policy with an insurance agent of your choice prior to closing.  The amount they charge will be part of your payment, and if you escrow your insurance in your payment, the renewals will be paid by the lender in the future on your behalf.  This annual premium amount is broken down to a monthly amount and added to your house payment.

What if you purchase a townhome or condo and the insurance is covered in your association dues? Do you need homeowner’s insurance in that instance?  The answer to this varies.  Most associations have insurance that covers the structure, so if it were to have damage, their coverage would insure that loss.  However, these policies don’t always cover cupboards, carpet, bathroom fixtures, etc., also known as “walls-in” or “all-in” coverage.  If they don’t have this, then you would need to purchase this policy, typically called an HO-6 policy and it would be included in your payment if the loan type you’re doing requires this.  If “walls-in” or “all-in” is part of their policy, then you wouldn’t need it for loan purposes, BUT, you will still want to purchase it to protect your personal belongings!

As you can see, when it comes to buying a home, there are a lot of insurance types to be familiar with. It can get a little confusing.  Hopefully, you will work with a lender that will help educate you on the requirements specific to your loan type.  As with ALL insurance related questions, please reach out to the appropriate provider or expert to answer questions you might have for your situation.