Beginners guide: How to buy home insurance
Fact-checked with HomeInsurance.com
After years of saving up for a down payment and getting your credit into top shape, the last thing you want to do is lose it all due to an unforeseen event out of your control. Homeowners insurance is the best way to protect your investment, offering reassurance that serious damage to your home will not cost you entirely out-of-pocket. Plus, it’s required by lenders if you hope to get a mortgage.
As you prepare for your closing date, you’ll need to make sure you have the right policy in place. This guide will walk you through what type of home insurance coverage to look for, how to purchase a policy and different ways to reduce costs and find something that fits your budget.
What does a homeowners insurance policy cover?
Homeowners insurance covers much more than just your home. In addition to protection for the home itself, policies typically cover your personal belongings and certain additional expenses that might come up after an unexpected event.
First and foremost, homeowners insurance covers the physical structure of your home: its walls, roof, foundation and anything else considered part of the property. Dwelling coverage pays to repair or rebuild your home if it’s damaged. However, not all causes of damage are covered. Each policy lists covered and specifically excluded perils, which might include vandalism, weather events and natural disasters. If your home is damaged as the result of a peril that isn’t covered, your insurer won’t pay for repairs.
From furniture to clothes to electronics, all the items you keep inside your home fall under the personal property coverage portion of your homeowners insurance policy. This coverage helps replace your personal belongings if they are stolen due to a covered peril, regardless of whether they were located on your property at the time.
Note that high-value items like jewelry and art are typically only covered up to a certain limit. If you own a lot of valuables, you may need to purchase additional coverage — known as a policy endorsement.
If you, your family members or your pets cause injury to another person or damage their property, you could face a financially-impactful lawsuit. Homeowners insurance includes liability protection, which covers your court costs and the amount awarded to the person who sues you, up to your policy limit.
Visitors to your home who are injured while on your property can sue you for the cost of their medical treatment. If you have a homeowners insurance policy with coverage for medical payments, you won’t have to pay the majority of those expenses out of pocket.
Additional living expenses
If your home suffers extreme damage, it may become temporarily unlivable while you repair or rebuild it. A homeowners insurance policy that includes coverage for additional living expenses will reimburse you for accommodation, food and other necessities in the meantime.
What are the types of home insurance?
Homeowners insurance policies aren’t one size fits all. Insurance companies offer several different standardized policies, each of which contains varying amounts and types of coverage. The policy you choose will depend on the type of home you purchase, your lender’s requirements and how much coverage you need.
HO-1 policies are the most limited form of homeowners insurance that exists. They cover just 10 essential perils like fire and theft. Liability and personal property coverage are not included. Most states have now eliminated this insurance option.
- Pros: Extremely low cost
- Cons: Unavailable in most states, not accepted by lenders
An HO-2 policy is the most basic form of home insurance coverage you can buy in most places, although many insurers don’t offer it. There are 16 named perils on an HO-2 policy, and coverage includes your dwelling, personal property, liability, medical payments and additional living expenses.
- Pros: Inexpensive, available for older and mobile homes
- Cons: Difficult to find, low coverage
The most common type of home insurance is an HO-3 policy. Instead of limiting coverage to a short list of perils, the policy only names exclusions; all other perils are covered. HO-3 policies cover your dwelling, additional structures, personal property, liability, medical payments and additional living expenses. However, personal property is only covered against listed perils and at its actual cash value for damages.
- Pros: Affordable premiums, covers your dwelling from most perils
- Cons: Low policy limits, limited personal property perils, only pays actual cash value
If an HO-3 policy doesn’t quite offer the coverage you need, the next step up is an HO-5 policy. This type of insurance offers similar coverage to HO-3 but insures your personal property on an open peril basis. You’ll also be reimbursed the replacement cost for items that are damaged or stolen.
- Pros: Better personal property coverage, reimburses at replacement cost
- Cons: More expensive than HO-3
Condo and townhome owners need a special type of homeowners insurance called an HO-6 policy. This policy is designed to work in tandem with the policy your HOA carries, and primarily protects non-structural aspects. For example, roof damage isn’t covered because this is considered community property.
- Pros: Only type of policy that covers condos and townhomes
- Cons: Relies on additional coverage from your HOA’s insurance policy
Owners of mobile and manufactured homes also have their own dedicated type of insurance in the form of an HO-7 policy. HO-7 covers the dwelling itself, your personal property, loss of use, liability and medical payments. Only named perils are covered; a few not on the list are earthquakes, hurricanes and flooding. You’ll need additional coverage for these if you live in a high-risk area.
- Pros: Tailored coverage for mobile and manufactured homes
- Cons: Doesn’t cover certain perils like hurricanes and flooding
If you own an older home, you may only be eligible for an HO-8 policy. Historic properties are often considered too risky for standard home insurance, so insurers offer HO-8 coverage instead. This type of policy covers just 10 named perils, leaving out issues that commonly plague older homes such as frozen systems and falling objects. You’ll also only receive the cost to rebuild your home if it’s destroyed, even if this amount falls short of its market value.
- Pros: Older home-friendly alternative to standard home insurance
- Cons: Only covers 10 perils, doesn’t pay market value for total loss
Factors that impact home insurance rates
The cost of homeowners insurance is determined on an individual basis. Insurance companies use many different factors to decide how much you’ll pay. For example:
- Your home’s structure — The size and construction of your home determine how much your insurance company will have to pay to repair or rebuild it after a covered loss. As you might guess, larger homes are more expensive to insure than smaller ones. However, disaster-resistant construction, such as a reinforced roof, can help lower costs.
- Your personal details — Your insurance company will ask you a series of in-depth questions when you sign up for coverage, many of which they’ll use to calculate your rate. In most cases, you’ll pay less if you’re married, don’t have any pets, or have good credit, for example.
- Your policy deductible — Each time you file a claim, you’ll be responsible to cover a certain amount of the claim total before your insurance company reimburses you, which is referred to as a deductible. The lower your deductible, the more you’ll pay in premiums.
- The insurance company — Each home insurance provider decides how to calculate its rates, so no two companies will give you identical quotes. Coverage recommends comparing quotes from multiple insurers before choosing a policy.
How to get home insurance as a first time buyer
As soon as you’re under contract on your new home, you should start shopping for a homeowners insurance policy. If you’re financing, closing will likely require you to produce proof of insurance, or your lender won’t move forward with the sale. Here are the basic steps to follow to obtaining home insurance:
1. Decide what type of coverage you need
Before you start looking at insurance companies, you’ll need to figure out what type of policy you need to purchase. This will depend on the type of home you’re purchasing and how much coverage you want. Make sure you check with your lender to find out what their specific requirements are as well.
2. Research homeowners insurance providers
Once you know what type of policy you’re looking for, you can start to compare companies that offer it. Use resources like J.D. Power to find reputable providers in your area, or refer to AM Best ratings to gain an indication of the providers’ financial stability.
3. Compare quotes
Based on the results of your research, you can narrow your options down to a few top contenders. Reach out to potential insurance companies and ask each for a quote to insure your new home. Make sure you get quotes for the same level of coverage with each provider so that you’ll have an even comparison.
4. Choose a policy
With your quotes in hand, you’ll have everything you need to choose the best policy for your new home. All that’s left to do is purchase coverage.
How beginners can save money on home insurance
On top of mortgage payments, closing fees and property taxes, your homeowners insurance may be limited, especially for first-time home buyers. While this is an item you should factor in when calculating how much home you can afford, there are plenty of ways to minimize insurance costs as much as possible.
- Think about the cost of insurance while home shopping. Older homes, those with swimming pools and neighborhoods with high property crime rates can raise premiums.
- Choose a higher deductible. While you’ll have to pay more out of pocket if you need to file a claim, you will see your monthly payments go down.
- Improve your credit. Not only can a better credit score get you more favorable rates on your mortgage, you’re also likely to pay less for homeowners insurance in most states.
- Install a security system. Insurance companies frequently give discounts to homeowners who have smoke detectors, cameras and alarms in place.
- Look for discounts. An easy way to save is with multi-policy discounts, which may be available if you purchase a home insurance policy from your current auto insurer. Most providers offer easy-to-qualify-for discounts that can lower your premium.
- Most home buyers need homeowners insurance in order to purchase and finance their new home.
- Based on the type of property you purchase, you’ll need to ask for a specific type of policy from your insurance provider. Each policy type offers a different level of coverage.
- Make sure you get quotes from multiple insurers to get the best rate.
Getting homeowners insurance for your new home is less complicated than it seems. Most insurers are more than happy to walk first-time buyers through the process of getting the right coverage, so don’t be afraid to ask questions. As long as you don’t leave home insurance shopping until the last minute, you shouldn’t have any problems securing a policy before your closing date.