3 min read insurance

What are the differences between all the insurances needed to buy a house with a mortgage?

What are the differences between all the insurances needed to buy a house with a mortgage?

Short Answer:

For most homeowners buying a house with a mortgage, there are 4 different types of mortgage they will encounter: homeowner's, lender's title, owner's title, and possible mortgage insurance. Each of the insurances plays an important role in the homeownership process. Homeowner's insurance is used in case of damage or theft to your home. Lender's and Owner's title insurance is used to make sure your ownership in the house is protected from problems with the title of the house. And finally, mortgage insurance allows banks and mortgage companies the ability to offer loans with less than 20% down.

Longer Answer:

Many of my clients get confused by all the different insurances that are required for purchasing a home with a mortgage. Frequently, I get asked what's the difference between each of the different insurance and are any of them optional. There are three buckets of insurance needed when purchasing a house: hazard, title, and mortgage:

1. Homeowners (Hazard) Insurance

Purpose: Protects the home and personal property against damage or loss.

Coverage:

  • Dwelling Coverage: Protects the structure of the home.
  • Personal Property Coverage: Covers personal belongings inside the home.
  • Liability Protection: Provides coverage if someone is injured on the property.
  • Additional Living Expenses: Covers costs if the home is uninhabitable due to a covered event.

Requirement: Mandatory if you are buying a house with a mortgage

2. Private Mortgage Insurance (PMI)

Purpose: Protects the mortgage lender if the borrower defaults on the loan.

Coverage:

  • Typically required if the down payment is less than 20% of the home’s purchase price or if a borrower is getting an FHA mortgage; regardless of down payement.
  • Can be canceled once the homeowner builds sufficient equity in their home (usually 20 to 25%).

Requirement: Mandatory for all FHA mortgage and Conventional loans without 20% down payment.

3. Flood Insurance

Purpose: Covers damage caused by flooding, which is not included in standard homeowners insurance.

Coverage:

  • Protects the home and belongings from flood damage.
  • Required for homes in designated flood zones.

Requirement: Mandatory if the home is in a high-risk flood area as determined by FEMA.

4. Title Insurance

Purpose: Protects against potential legal issues related to the property’s title.

Coverage:

  • Owner’s Title Insurance: Protects the homeowner’s financial interest in the property. The value of the policy starts with the sales price and increases, as time goes on.
  • Lender’s Title Insurance: Protects the lender’s interest in the property. The coverage amount is normally the loan amount and decrease over-time as the mortgage is paid down.

Requirement: Lender’s title insurance is mandatory when getting a mortgage; owner’s title insurance is optional but highly recommended.

5. Earthquake Insurance

Purpose: Covers damage caused by earthquakes, which is not included in standard homeowners insurance.

Coverage:

  • Protects the home and belongings from earthquake damage.
  • May include additional living expenses if the home is uninhabitable.

Requirement: Optional but recommended in earthquake-prone areas.

Conclusion

Understanding and securing the necessary insurance when purchasing a home with a mortgage is crucial for protecting your investment (ie the home). While some insurances are mandatory (like Hazard and lender's title insurance), others are optional (owner's title insurance and earthquake) but provide valuable protection. It’s essential to evaluate your specific needs and risks to make informed decisions about the coverage required for your new home.

Have additional questions about the insurance needed to purchase a home with a mortgage, I am happy to answer them. Reach out to me at teamjd@mainstreethl.com

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These blogs are for informational purposes only. Make sure you understand the features associated with the loan program you choose, and that it meets your unique financial needs. Subject to Debt-to-Income and Underwriting requirements. This is not a credit decision or a commitment to lend. Eligibility is subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral, and underwriting requirements. Not all programs are available in all areas. Offers may vary and are subject to change at any time without notice. Should you have any questions about the information provided, please contact me.

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