Unlike auto or renters insurance, securing homeowners insurance takes time to applie and take effect. It is best to get started just after your real estate contract has been accepted—and well before you move in. Yet, most folks put this important step off, which could mess with the closing—especially if there’s a mortgage. So, we thought we’d give you the lowdown on getting homeowners insurance.
Choosing a competent and experienced agent is a good start. We talked to State Farm Agent Dave Frederickson in Edgewater, Chicago. We peppered him with questions and he gave us loads of information to share with our buyers. Here’s what we learned:
Q. When is the best time for a home buyer to look for homeowners insurance? As soon as your contract is signed. It’s better to have this in place earlier than later. Some banks use the policy information to finalize the mortgage. Further, many contracts require the buyer to confirm the property’s insurability within a week of signing the contract.
Q. Why should a buyer start looking for homeowners insurance so early? Underwriters need time to review all of the information. If they see anything that needs repair or is out of code, they might not approve the policy—or ask for repairs or estimates for repairs, which also take time to complete.
If a policy is approved but requires repairs, the underwriters will require proof that the repairs were complete in order for the insurance policy to remain in place.
Q. What happens if a buyer waits to get homeowners insurance at the last minute? Procrastination could delay the closing, as mortgage lenders won’t close on an uninsured property.
Q. What kind of information will the insurance company need? Essentially, the underwriters need to determine the costs of replacing or rebuilding the home (not just the cost to buy it). To determine that amount, buyers generally need to provide:
• Amount of the final offer
• Contact info for lender or bank
• Contact info for the buyer’s attorney
• Copy of the mortgagee clause
• Copy of the appraisal
• Photos of the home
A buyer should also consider the replacement cost of their belongings—we’ll get to that in a minute.
Q. What type of insurance do mortgage lenders require? For single-family homes, lenders require a basic HO3 policy or a HO5 policy, which offers more coverage than an HO3. For condominiums, lenders require an HO6 policy.
Keep in mind, each insurance company has standard homeowners policies, but each company offers slightly different coverage. It’s important for home buyers to take the time to compare a few different offerings.
All policies provide a level of coverage for the dwelling, but it varies for single-family homes and condominiums.
Single family home HO3s and HO5s provide coverage for:
• Dwelling
• Dwelling extension, like a garage
• Contents/belongings
• Additional living expenses in case of an event
• Various levels of liability for accidents
Q. What about insurance for condominiums?
Condominium insurance works differently. The association should have a master policy, which will protect the exterior building. It may cover the building and each units' walls, or only the building outside the units' walls. Each association is different, sure to check the bylaws.
Condominium HO6s provide coverage for:
• Contents/belongings
• Additional living expenses in case of an event
• Various levels of liability for accidents
Q. How can a buyer determine if they need additional coverage for their belongings? Before you talk to your agent, take a look at your belongings and consider how much it would be to replace them. State Farm has some pointers for making a home inventory.
In general, buyers might need extra coverage if the home has high-end appliances, if they own expensive items, or if the bank says you don’t have enough coverage. This is a good thing to ask your insurance agent.
Q. What else isn’t covered with basic homeowners insurance? Most policies don’t cover extraordinary events, like floods (flood insurance would be purchased via FEMA), earthquakes, or sewer back-ups (a common Chicago-area occurrence).
Q. Wait, did you say earthquakes? Yes. Most people don’t realize that there’s an active seismic zone in Southern Illinois, the New Madrid Fault line. But the further you are from the fault line, the cheaper the coverage cost of earthquake insurance.
Q. What are some money-saving tips for homeowners insurance? There are a few ways to save, including:
• Bundling homeowners with auto insurance
• Getting a security system
• Choosing a high deductible
• Paying out-of-o=pocket for small repairs (below deductible amount)
Also, if you’ve been with your insurance company for a long time, you might get a loyalty credit. At State Farm, if you have another policy (say renters), they may offer a loyalty credit that transfers to the next policy.
Q. Can a buyer simply transfer an existing homeowners policy to a new home? No, the policy has to be re-written.
Q. In Illinois, do homeowners need to use an in-state insurance broker/agent? Yes. But if the home is close to a state line, buyers can find an agent that is licensed in both states (like Indiana/Illinois or Wisconsin/Illinois), which could be helpful if the buyer is moving (or might move) across the border.
Q. What if the home will be vacant for a few months after closing? Some buyers don’t plan to move in right away. If this is the case, the buyer will need to work closely with their agent. It is harder to insure a property if it’s not occupied—many companies will decline insuring it. But it’s not impossible. For example, if they plan to renovate before moving in, they’ll need to provide a timeline and work order to obtain insurance.
Q. Is there anything else a buyer should know about buying homeowners insurance? Research the insurance carrier. The cheapest insurance, might not be the best value in the long run. Your home is a giant investment, it’s smart for buyer to have a good agent and company to turn to for help.
Thanks to Dave Frederickson of State Farm for his helpful information and time. If you’d like to pepper Dave with your own questions, you can email him at David@davidfred.com.
If you have any questions about your real estate transaction for our firm, find us at mhwasserman.com.