Never was it more evident that the average American is woefully misinformed about insurance than when the Affordable Care Act kicked in and millions had to purchase health insurance. Deductibles, co-pays and out-of-pocket maximums were terms completely unfamiliar to them.
It’s no different with other forms of insurance, including that involved when you purchase a home. If you think that homeowner’s insurance is all that is required, think again.
Title Insurance
Title insurance is a policy required by the lender as protection against the possibility of claims against the property that aren’t uncovered during the title search. There are two types of title insurance, a lender’s policy and an owner’s policy. The former is required in most regions and the latter in some.
A title insurance company will issue the policy, based on a thorough check to ensure that the person selling the home actually has the right to do so. The title examiner will use public records to trace the property’s history to ensure no-one else has claims against it. If he or she finds problems, known commonly as “clouds” on the title, they will need to be removed before a policy is issued.
Homeowner’s Insurance
Homeowner’s insurance, sometimes confused with Hazard Insurance is yet another policy that protects the lender and, while a lender requirement, the policy also protects the homeowner. Hazard insurance, by the way, is part of the standard homeowner’s insurance policy.
Policies vary in what they cover, but most insure against theft, fire, wind and hail damage, vandalism and more. Flood and earthquake coverage is typically not covered.
Meet with an insurance agent to assist you in figuring out how much coverage you’ll need, based on the cost of the home.
Private Mortgage Insurance
Also known as PMI, private mortgage insurance is usually required when a borrower puts less than 20 percent of the purchase price down on the loan. The insurance protects the lender in case the borrower defaults on the loan.
The homebuyer pays the premium for this insurance even though he or she derives no benefit from it other than being able to purchase a home with less than a 20 percent down payment. Some loans, such as the VA loan, don’t require PMI.
By the way, if you’ll be obtaining an FHA-backed loan, PMI is known as MIP (for Mortgage Insurance Premium).
The best people to speak with if you have questions about any type of insurance required during the home purchase process are your lawyer, your real estate agent and your insurance agent.
