You Need Home Insurance Before Closing on a Home. Here's Why

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  • Home buyers will be required to have home insurance at closing.
  • A mortgage lender will require this if the home buyer is taking out a loan.
  • Going without insurance also presents a huge risk to a major investment.

Don't buy a home before reading this.

When buying a home, there are a lot of tasks to take care of. Home buyers need to make sure they shop around for a mortgage loan and that they find a property that is both a good fit for their family and priced fairly.

There's another essential task to complete before getting to the closing table, though. It involves buying homeowners insurance. This isn't optional in most cases and, even if it wasn't mandated, home buyers should still make sure to get coverage before closing on a property.

There are two big reasons why that's the case.

1. Lenders require homeowners insurance

Any homeowner who is using a mortgage to purchase a property will be required to have homeowners insurance coverage in place. Lenders mandate this for a simple reason: They have a legal interest in the home because it's the collateral for the loan.

Lenders need to be able to foreclose and get paid back if homeowners don't pay, so they want to make sure the property is properly insured. If a mortgage lender didn't require insurance and the home was destroyed with no coverage in place, the buyer could theoretically walk away, and the lender would be left with a loan that they had no means of collecting on.

To make certain this doesn't happen, lenders require insurance that would be sufficient to rebuild the property if it was destroyed or to repair it if it was damaged by a covered peril. It's not possible for a buyer to get the funds from a mortgage to close on a home without providing proof of insurance, and if homeowners were to cancel a policy later, the insurer would have the right to buy coverage on their behalf (often at an inflated price).

2. Buyers shouldn't leave a valuable asset unprotected

If a home buyer does not get a mortgage to purchase a property, then there may be no lender requirement that they purchase homeowners insurance. This doesn't mean it's a good idea to close on a new house without a policy in place, though.

At the end of 2022, the average price of a sold home was $535,800, according to data from Federal Reserve Bank of St. Louis. This is a pretty substantial sum of money. Most people cannot afford to just lose that money if something were to happen to the house after closing but before insurance was put in place.

By buying replacement cost insurance, homeowners can make sure they don't end up losing the substantial funds they put down if they paid out of pocket for the property. If they close on the house and a fire happens the next day or the home is vandalized, insurance would foot the bill (minus any deductibles).

Homeowners should be aware of the importance of having insurance in place by the time of closing and should start shopping around for coverage early on. By taking the time to find the right insurance from an affordable company, home buyers can be ready and able to protect their property from day one of ownership.

Our picks for best homeowners insurance companies

There are many homeowners insurance companies to choose from. We’ve researched dozens of options and short-listed our favorites here. Looking for a green build discount or easy bundle policies? Want an easy-to-use interface? Read our free expert review and get a quote today.

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