Buying a house is an adventure that is both thrilling and frightening. Your home will be the one place that is truly yours, where you can get away from the stresses and worries of the world. At the same time, the buying process comes with its own share of frustrations and anxieties and may have you wondering how to get a mortgage. When getting a home loan in Dallas, Houston, or Austin, Texas, you may be wondering whether you need homeowner’s insurance to complete the process.
Getting a Home Loan in Dallas, Houston, or Austin, Texas: Do You Need Homeowner’s Insurance?
When it comes down to legal requirements, there are no laws that say you have to have homeowner’s insurance on your home. This may feel like a relief because it’s one less expense you’ll have to worry about, but keep in mind that this really only works if you have the money upfront to buy the property.
If you’re like most people, then you probably need a loan to be able to afford the house of your dreams. While there may not be any laws that require you to have homeowner’s insurance, most lenders require this before giving you the money to buy your home.
Why Do Lenders Insist You Have Homeowners Insurance?
Lenders are putting themselves at risk. As you’ve probably realized, most homes aren’t cheap. Depending on where you want to live, you’re more than likely looking at buying something that is worth hundreds of thousands of dollars if not more.
You obviously don’t have this kind of money sitting around, so you ask a lender to help. They agree, under the assumption that you are going to pay back the money you borrowed over the course of time they have set forth. Typically, that’s 30 years, but it could also be 15 depending on the loan terms.
Anything Can Happen During the Life of the Loan
Until the loan is paid off, the lender actually owns your house. If you were to stop paying your mortgage payments for whatever reason, they could come in and seize your property and sell it at the cost of whatever amount is left on the loan.
Your goal is to pay off your home loan in 15 or 30 years. However, during that time, the unexpected can happen, including fires or other natural disasters. If the house is destroyed in any way, that doesn’t mean you get out of paying off your loan. The lender still wants their money. If a disaster strikes but you have homeowner’s insurance, your policy will pay off your loan so that you don’t have to pay out of your own pocket.
Homeowners Insurance Isn’t Just for Lenders
Lenders require homeowner’s insurance to protect their investment until you give them back the money you borrowed. You are also protected by having insurance in place. Without this coverage, if something devastating happened to the house, you would be responsible for paying for the remainder of the loan out of your own pocket. If you can’t make those payments, the foreclosure is going to have terrible repercussions on your credit and the ability to borrow money in the future.
When getting a home loan, one thing you need to realize is that homeowner’s insurance is not part of the mortgage. It’s something separate that you have to take out yourself. That means that you can shop around to find the best deal, but more than likely, you’ll be required to carry a certain amount of insurance on your home.
How Much Homeowner’s Insurance Will the Lender Require?
The amount of homeowner’s insurance that you’ll need when buying a home in Dallas, Houston, or Austin, Texas, will depend on the lender you borrow from. In some cases, the lender will require that your home is covered for 100% of its replacement cost. This is how much it would cost to rebuild your house from the ground up if it was completely destroyed.
Some lenders only require that you have insurance to cover the unpaid portion of your mortgage balance. The downside to this option is that if something happens to your house, you may not have the money to cover the damages. Your loan will get paid off, but you may still have to pay for home repairs out of your own pocket.
Are There Other Homeowner’s Insurance Policy Requirements?
Depending on where you live and who your lender is, in addition to the requirements for minimum levels of coverage, you may also have to add other items to your insurance policy. Some of these might include the following:
Specific Types of Insurance Coverage Needed
In most cases, the lender will expect that your home is protected against the following hazards (at the very least):
- Weather-related issues
- Theft and vandalism
- Riots and civil unrest
- Smoke damage
- Falling objects (could include trees in the area)
- Frozen pipes (depending on where you live)
- Vehicle damage (not from vehicles you own)
The lender has the right to ask you to pay for additional coverage if your primary policy doesn’t have these hazards already included. They may also ask you to add other insurance coverage to your policy as well, including flood insurance or windstorm insurance if you live in a coastal area that could experience hurricanes.
The Lender Will be the Loss Payee
When you are getting homeowner’s insurance to secure the mortgage to buy your home, you and the lender will be named as the loss payee. That means that if you file a claim, the check from the insurance company is made out to you and the lender.
The purpose of this is to ensure that you’re actually using the money to pay for repairs to your home. Before any work can be done, the lender will have to sign off on the expenses and the check so that you can cash it.
Your insurance deductible is a set amount that you have to pay for any repairs that need to be done to your damaged home. In some cases, lenders will require that the deductible not exceed a certain amount, reducing your out-of-pocket cost.
Proof of Coverage
Your lender will require proof of coverage, and this often has to come from the insurance company directly. Getting homeowner’s insurance in place as soon as possible is in your best interest, as it could impact your ability to buy the home.
How to Get a Mortgage
If you find yourself wondering how to get a mortgage, you can start your search online. This will give you an idea of who in your area may be willing to lend you a lot of money to buy a house. Make sure you work with a lender that is reputable and trustworthy. Before signing any paperwork, do your due diligence and find out if the lender is professional and experienced.
Buying a home is the American Dream, but the process can be long and daunting. If you borrow money from a lender, you will need to have homeowner’s insurance in place to complete closing. Should you find that you have questions about any part of the home-buying process, contact Home Loans with Gary today.