Do You Need Homeowners Insurance Before Closing?

Homeowners insurance is a standard requirement for most home purchases involving a mortgage. This coverage must be secured and active before the closing process can be finalized. The article explains the reasons behind this requirement and guides homebuyers through the necessary steps to ensure their insurance is in place.

Lender Requirements and Purpose

Mortgage lenders require homeowners insurance to protect their financial investment in the property. A home serves as collateral for the mortgage loan, and without adequate coverage, the lender’s security would be at risk from damage. This prevents substantial losses if the property’s value diminishes, protecting them from an unpaid loan and a devalued asset.

Lenders mandate that the dwelling portion of the policy covers perils such as fire, lightning, wind, hail, theft, and vandalism. Dwelling coverage is often referred to as “hazard insurance” and is a component of a standard homeowners policy. While not legally required by any state, lenders universally enforce this for financed home purchases. Cash buyers are not subject to this mandate, but obtaining insurance remains a prudent decision to safeguard their investment.

Key Policy Information

Securing a homeowners insurance policy requires specific details for accurate quotes and appropriate coverage. Insurers ask for the property’s address, age, square footage, roof type and age, and any recent renovations or safety features like alarm systems. They also consider the estimated replacement cost of the home, which differs from its market value as it excludes land value.

A standard homeowners policy includes several core components:

• Dwelling coverage protects the physical structure of the home and attached structures like garages.
• Personal property coverage insures belongings such as furniture, electronics, and clothing, often covering 50% to 70% of the dwelling coverage amount.
• Liability coverage provides financial protection if someone is injured on your property or if you accidentally damage someone else’s property, covering legal fees and medical expenses.
• Additional living expenses (ALE) coverage, also known as loss of use, helps cover costs like hotel stays and meals if your home becomes uninhabitable due to a covered loss.

Securing Coverage Before Closing

The process of obtaining homeowners insurance should begin well in advance of the closing date, ideally as soon as the purchase contract is signed. Comparing quotes from multiple insurance providers is advisable to find a policy that balances coverage limits, deductibles, and premium costs. The chosen policy must meet the lender’s requirements, including sufficient dwelling coverage to rebuild the home.

The first year’s premium for the homeowners insurance policy is paid upfront before or at closing. This payment ensures the policy is active from the moment ownership transfers. Proof of coverage, such as an insurance binder or a declaration page, is then provided to the lender and closing agent. The lender must be listed on the policy, usually as a “Lender’s Loss Payee” or “Mortgagee,” which protects their interest in a covered loss and ensures they receive notifications.

Role in the Closing Process

At closing, the homeowners insurance policy plays a definitive role in finalizing the home purchase. The closing agent verifies that the insurance policy is active and satisfies all lender requirements. This verification is a mandatory step before mortgage funds can be disbursed.

Often, the homeowners insurance premium is integrated into the mortgage’s escrow account. Initial escrow funds for insurance and property taxes are collected at closing, and a portion of future monthly mortgage payments is allocated to this account to cover subsequent premium payments. The proof of insurance, whether an insurance binder or declaration page, becomes part of the official closing documents, confirming the property is adequately protected from ownership transfer.