Understanding Home Owners Insurance

Understanding Home Owners Insurance

What is It, What Does It Cover, and Why Do I Need It?

There are a few different types of insurance used in conjunction with a home and a mortgage loan.  Here is a brief overview of each and help to understand the differences:

Homeowner’s insurance (HOI) protects your home and personal belongings from fire, theft, vandalism and other perils.  HOI includes two protections.  One protection is for property (the house and what’s in it), and the other protection is for liability (anyone that is harmed).  HOI is always a good idea to have because of the inherent dangers that exist both for the property and any people on or in the property.  HOI is only required if there is a mortgage on the home.  Mortgage lenders like Alliance Home Loans will require that a policy is in place that meets their standards.  However, a homebuyer is free to shop for HOI from any licensed provider as long as the policy meets the standards & requirements of the mortgage lenders.

Mortgage insurance (MI) is an insurance policy that mortgage lenders require for most loans with less than a 20% down payment.  The insurance policy does not protect the homeowner.  It provides insurance to the lender or investor (the company that ultimately buys the loan) if the loan goes into default.  Just in case the homeowner stops making mortgage and the home is foreclosed upon, this insurance policy will cover some or all of the losses experienced by the lender or investor.  MI is charged as a monthly fee added to your mortgage payment or upfront as a one-time charge financed into the loan amount, or a combination of both.  MI is called a few different things depending on the loan type.  For FHA loans, it is known as mortgage insurance premium or MIP and is charged both monthly and upfront.  For conventional loans, it is known as private mortgage insurance or PMI.  PMI for conventional loans is provided by private companies and can be paid anyway you choose: monthly, upfront, or both.  For VA loans, there is a funding fee charged up front, and USDA loans charge a guarantee fee both monthly and upfront just like FHA.

Property damage caused by a flood may possibly not be covered by HOI.  The Federal Emergency Management Agency (FEMA) has mapped the entire United States based on flood risk.  Mortgage lenders will do a flood search on any property you wish to finance.  If the search reveals that the home is at a higher risk for flooding, the lender will require a separate flood insurance policy from your HOI.  Flood insurance is sold just like regular HOI through state licensed insurance agents.  If flood insurance is not required according to risk, you may opt to still get your own flood insurance policy anyway.  This is not a common option, but it is your option as a homebuyer.

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