If you are buying a home, part of the mortgage process will include obtaining the appropriate homeowners insurance to protect your investment.
Search for Homeowners Insurance Early
You should begin looking for homeowners insurance early in the process of buying a home. One reason is that you will want to make sure that there are not any issues that could prevent you from being able to obtain homeowners insurance, such as a bad roof.
There are also circumstances that could cause the process to take longer than usual. For instance, we have dealt with homes that have previously had sinkhole repairs. These homes are insurable, but the documentation required and review by the insurer is more extensive and may cause delays if not started early.
You Must Know the Cost of Homeowners Insurance to Estimate Your Payment
You will also want to know what the cost of the insurance is going to be so that you will be able to estimate what your total monthly payment will be for principal, interest taxes and insurance. If insurance costs are significantly higher than originally estimated, it can negatively affect the debt to income ratio and loan approval.
In addition to the standard homeowners insurance, you will also need to determine whether flood insurance is required. Your insurance agent will be able to tell you whether the property is in a flood zone. The lender will obtain a “flood certificate” early in the underwriting process, which will also indicate whether flood insurance is required.
Flood insurance has been an issue of significant concern for home buyers in recent years as legislative changes enacted in 2012 resulted in significant increases in flood insurance premiums, particularly in coastal areas. Certain provisions of this legislation were repealed and/or modified in March 2014, putting a cap on flood premium increases and providing refunds to homeowners who had already experienced large premium increases.
Your insurance agent will assist you in determining the amount of coverage needed to protect your home and will provide you various options for deductibles and additional coverage options you may wish to add to your policy. We typically advise our clients to obtain at least two or three quotes as policies and rates can vary by company. Your insurance agent may also suggest that you obtain certain inspections, such as a four-point inspection or wind mitigation inspection, which can save you money on your policy.
Once you have finalized your insurance application, your lender will communicate with your insurance agent to obtain the necessary “evidence of insurance” to provide to the mortgage underwriter. In most cases, the insurance premium can be included in the closing costs and paid at closing. A full year’s policy will be required to be paid in advance.
One of the many insurance agencies that has helped Florida Homeowners is A to Z Insurance Solutions. When you start looking for a home, contact an insurance agent for a homeowners insurance estimate, which you will need to estimate your monthly payment.
Escrow Account for Homeowners Insurance Payments
Unless you are putting at least a 20% down payment on the home, in most cases, the lender will require you to set up an escrow account for future payments of insurance. If you are putting 20% down, you may elect to waive setting up an escrow account, but there is often a fee associated with obtaining such a waiver.
If you choose or are required to set up an escrow account, in addition to the first year’s premium collected at closing, the lender will also collect a few additional months (usually 2-3 months) cushion to be held in your escrow account for possible future increases in your insurance premium.
Closing Your Home Loan
After closing they will collect, as part of your monthly mortgage payment, 1/12 of the annual insurance premium. By the time your insurance premium comes due the following year, the lender will have collected and be holding in escrow enough to pay the annual premium due. Periodically they will perform a reconciliation of funds held in your escrow account and will also provide you a statement of the funds held. Any excess funds held are returned. If there are any shortages in amounts needed, they will either increase your monthly escrow payment or require you to deposit funds to make up the amount needed.
Your lender should be able to assist you in obtaining quotes, determining the type of insurance you will need to obtain and explaining how your escrow account will work.