Part 2: Closing on your Home
This post is part 2 of a two part series. Part 1 covered what to look for when shopping for your home.
So, you have found the home you wish to purchase! I’m sure you are very excited. You have a signed purchase agreement and a target closing date which is likely 6 to 8 weeks away.
Your first step, of course, will be to talk to your lender to get the ball rolling on your mortgage. At this point, your lender is likely to give you a document called a Good Faith Estimate. Among other things, this estimates how much cash you will need to pay in closing costs.
Part of your closing costs will be your first year’s Homeowners insurance (often referred to as “Hazard insurance” by the mortgage industry). On their Good Faith Estimate, your lender will guess how much this home insurance will cost you. Keep in mind that this is only a guess; your lender is not an insurance expert and is not basing this number on the many factors that affect insurance rate. Rather, this estimated insurance premium is likely a round number based on averages they see for homes with similar purchase prices.
Within the first couple weeks after your accepted offer, it will be good to get the ball rolling on your Homeowners insurance. If you already have a relationship with a trusted local insurance agent, you will likely call him or her and advise them of the home you are buying so that they can put together a proposal to insure it. If you don’t have this kind of existing relationship, now is the time you will need to choose an agent. I find that this is the situation for first-time homebuyers more often than not; frequently young people buy their Auto insurance online, through an out-of-town agent or under their parents until they buy their first home.
If you do need to choose an insurance agent at this point, I recommend thinking big picture. Sometimes people choose their agent simply by calling around and seeing who is offering the lowest insurance premium today. While it’s definitely important to get a good price for your new Homeowners insurance, it’s equally important to get a good agent – someone who you can begin a relationship with and trust to assist you with your insurance needs for months and years to come. So I recommend interviewing your prospective agent(s) and asking them questions other than just how much their current rates are. For much more about questions to ask, please read my post How to Choose an Insurance Agent.
Getting a Quote
The agent(s) you reach out to will need to gather information about the home you are buying. If it was listed through a realtor, they will likely pull up the listing information online. This tells the agent a fair amount about the home, but they may have more in depth questions to ask you, for example the age and type of components such as the roof, heating, plumbing and electrical. What I’ve found is that the average buyer often doesn’t know these details, and so I’ll often ask homebuyers to forward me a copy of their home inspection report, which typically will answer most of these questions. For further discussion of how these home components affect your insurance, read my post Insuring an Older Home.
Your agent will also ask you questions that are more personal in nature. Have you had prior Homeowners or Renters insurance, and have you recently filed any claims? Do you have any animals and, if so, what kind? (If you have a dog, what is the breed and has it ever bitten?) Will you have a swimming pool or trampoline on premises? Will you conduct any business out of your home? Will you occupy this home as your primary residence? These questions, and others like them, will be used by the agent to confirm what policy and coverage you will qualify for and may affect the rate you pay as well.
At this point, it will probably also be good to talk to the agent about bundling your Homeowners and Auto insurance together. Most Homeowners carriers give large discounts (typically ranging from ten to thirty percent) if you also buy your Auto insurance through them as well. Another reason to consider bundling is that in our current market in Minnesota, many carriers don’t even offer unbundled Homeowners insurance, and sometimes these are the carriers with the best rates. While there are exceptions, in many cases you are likely to pay ten to fifty percent more for your Homeowners insurance if it isn’t bundled with your Auto insurance. Please note that bundling Home & Auto together doesn’t mean that they have to be paid together; usually that is not the case as your Homeowners is paid through your mortgage while you pay your Auto insurance yourself.
After the agent has all the information they need, they will need to put together a proposal for you. If you are talking to an independent agent such as us, the agent will likely be checking into several different insurance companies to find you the best value. Depending on the complexity of your situation, how many companies the agent is quoting and how many other quotes they are working on at the time, this quoting process may take a few days. This is a reason not to put off starting the insurance process until a couple weeks before your closing date!
If you talk to more than one agent, once you receive their quotes, you will need to compare and decide which agent you wish to choose. Again, I recommend basing this decision on more than just price! While price will be the most obvious way to compare, a minor difference in premium won’t seem nearly as important down the road if you have a loss and need to file a claim. I encourage you to ask questions of each agent, to try to understand how their proposed coverage might vary and how well you feel you can work with them going forward. (An important note: If you are buying a manufactured home, read my blog post Buyer Beware When Insuring your Mobile Home.)
Meeting With your Agent
Once you have reviewed the insurance proposal(s) and you have chosen the agent who you wish to use, the next step is typically meeting with your agent to sign an application for insurance. Here’s where the agent you choose will make a difference: While many agents may simply just tell you where to sign the application, it’s my opinion that a good agent is going to take the time to sit down with you, explain the coverage you are buying and go over the options and choices you can make to customize your insurance policy. We have this discussion with every new client, and I’ve been told by many new customers that this was the first time anyone ever explained their insurance to them.
Once your agent has a signed insurance application, he or she will be able to send a binder to your mortgage lender. A binder is a document that confirms that your insurance coverage will be effective on the date of closing. It indicates how much the home will be insured for, advises of the type of coverage and the deductible, shows the annual premium and it displays the mortgage company who will be listed on your policy. This document is required for your lender to prepare your final closing documents. Most lenders want a binder at least one or two weeks prior to closing.
Paying for your insurance
As referenced above, when you arrive at closing, you will be paying for your first year’s worth of home insurance. Then, starting with your first monthly mortgage payment, your bank will deposit part of that payment into your escrow account to cover future property taxes and insurance that will come due. Basically, you will be paying one-twelfth of your annual Homeowners insurance premium every month as part of the mortgage payment. Those amounts will sit in your escrow account until your home policy renews a year after closing, at which time your mortgage company will pay your next year’s insurance premium. More information about escrow accounts.
While I've talked to some first-time home buyers who assumed that it’s up to their mortgage company to take care of their Homeowners insurance, in reality this important decision is your responsibility to make. While your mortgage company might be the one writing the check to your insurance carrier, they’re using your money to do so. Homeowners insurance policies provide much more protection than just covering the home as collateral for your loan. A good Homeowners policy also covers your equity in the home, your personal property and your personal liability. It even covers your increased living costs if you can’t occupy your home due to a covered loss. So choosing the right coverage – and agent! – is an important decision you will make as a new homeowner.
Ken Cobb is owner of Pine Country Insurance and has been active in the insurance industry for over 15 years. Meet Ken.
Coverage descriptions found in this blog are summaries provided for general educational purposes and cannot fully detail the terms, conditions, limitations or exclusions of a specific insurance policy. Please read your policy carefully.