Whenever you have a loan against the value of your home, whether it is a mortgage or a home equity loan, your lender will require homeowners’ insurance. They will also require specific coverage amounts and policy types. As a condition of closing, they will ask for proof of insurance in the form of a binder or certificate of insurance.
Here are some statistics for 3 states where we do business:
- Kentucky – On average, 24 tornadoes touch down in Kentucky every year. The state has also experienced wildfires, heavy rains, and ice storms.
- Florida – For 2022, weather forecasters have predicted the odds of a named storm striking Florida at 96% and the odds of a hurricane strike at 75% chance.
- Indiana – There are an average of 22 tornados that happen each year in Indiana. It is also susceptible to earthquakes, ice storms, and flooding.
With Hurricane Season lasting from June 1st through November 30th in Florida and “Tornado Alley” slowly shifting towards Western Kentucky, it is more important than ever to have the proper type and amount of insurance.
Mortgage Warehouse suggests that our buyers choose an insurance agent and provide us with a binder and invoice within 5-10 business days of an executed sales contract. Issuing a new policy can sometimes take a few days or weeks, depending on the underwriting process. Binders are often provided as temporary evidence of insurance coverage prior to the issuance of a formal insurance policy.
Why do we need it so quickly?
- It affects your DTI Ratio – We will need to calculate your new DTI (debt-to-income ratio). The cost of your homeowners’ and/or flood insurance (if needed) could be escrowed and added to your mortgage payment. We will need this information in order to send your file to underwriting.
- Closing – We need to make sure that your Title Company has an invoice to pay your Insurance Agent at closing, if necessary.
- A named storm can delay your closing – In Florida, if a named Tropical Storm or Hurricane enters an approximately 16,000 sq. mile box extending over the state or in the Atlantic Ocean, then the insurance companies will suspend binding coverage. This occurrence is also referred to as “The Storm is in the Box.”
Weather is unpredictable and if there is a named storm close to Florida, you will not be able to close on your home unless you already have a binder or policy in place. That is why we require that you get insurance well before your scheduled real estate closing date.
In Kentucky, a Homeowners’ Policy is generally the only policy a lender will require since it covers wind damage from tornadoes.
The flooding caused by a hurricane and storm surges that occur is typically excluded from a standard policy. You may need to purchase an endorsement or a separate policy to have coverage for hurricanes and flooding.
Most lenders require your policy to at least cover your loan amount. However, if you have a large down payment on your home, your coverage amount should be higher. In the event of a disaster, you want to make sure you will have enough coverage to be able to rebuild your home at today’s cost. Your insurance agent may offer you 2 types of coverage: Replacement Cost and Market Value.
- Replacement cost is the amount you would need to replace or rebuild your home.
- Market value is what your home is worth on the real estate market.
There are pros and cons to both types of coverage, so you should review both options with your insurance agent to make sure you are not underinsured.
Although most homeowner policies include an inflation guard endorsement to automatically increase your coverage annually, you should check with your insurance agent once a year to make sure you have adequate coverage.
When comparing homeowners’ insurance policies, be aware that one policy might be cheaper only because the coverage is less or the deductible is higher. They also might list certain exclusions.
Additional policies to consider:
- Replacement Cost Coverage (RCV) Option
- Flood Insurance
- Hurricane Insurance
- Earthquake Insurance
- Sinkhole, Water or sewer backup, Debris removal, Mold, Termites
- Endorsements/Riders for exempt items in the policy like jewelry, antiques, artwork, etc.
If you are purchasing a Condo, contact your Property Management Company to determine what kind of coverage is required. You may need a Form HO-6, which provides some coverage for the structure but primarily covers the personal property and liability of the insured.
Even though Homeowner’s Insurance is a necessary expense, it does offer the homeowner peace of mind and comfort in knowing that you have protection if your home or any structures on it are damaged, if someone gets injured on your property, or after a burglary. Homeowners insurance helps protect one of your biggest and most important investments- your home and its contents.