First-Time Homebuyer: Frequently Asked Questions (FAQ) Series – Part 10

Understanding Insurance, Homeowners Insurance and Warranties

Houston House Insurance

When purchasing a home, spending a little money
upfront will go a long way toward keeping you protected in the future. While some protections, such as mortgage insurance, are required and do more to protect the lender than you, other types of insurance and coverage will help you keep you and your investment protected. The following Frequently Asked Questions (FAQs) are provided by our Houston Mortgage experts to help you learn more about these protections and why you need to have them.

What is mortgage insurance?

Mortgage insurance is a type of insurance policy that provides the lender with protection against some or most of the loss that would result if you stopped making payments on your loan. Borrowers who make a down payment of less than 20 percent are typically required to purchase a mortgage insurance policy in order to reduce the amount of risk the lender is taking by approving the loan.

As with other types of insurance, such as auto or home insurance, you must pay a premium toward your
mortgage insurance policy. If you fail to repay the loan as agreed, the lender may foreclose on your property and then file a claim with the mortgage insurance company in order to reclaim some or most of the losses.

Is it possible to receive a discount on the FHA initial mortgage insurance premium?

Yes. For those who complete the Homebuyer Education Learning Program, or HELP, it is possible to receive a reduction in the initial FHA mortgage insurance premium. The HELP program educates homeowners on a wide range of topics, including:

  • Budgeting
  • Finding a home
  • Getting a loan
  • Home Maintenance

Those who complete the program may have their initial FHA mortgage insurance premium reduced from
2.25 percent to 1.75 percent of the purchase price of the home.

What is PMI?

PMI, or Private Mortgage Insurance or Insurer, is a privately-owned company that provides mortgage insurance.

Most insurers offer standard programs as well as special affordable programs for certain types of borrowers. Lenders use the guidelines provided by these companies to help them determine whether or not
a borrower is eligible for a mortgage loan. In general, Private Mortgage Insurers require larger down payments and have stricter qualifying ratios. On the other hand, their premiums are typically lower and they provide insurance on loans that exceed the FHA limit.

Do I need to purchase homeowner’s insurance?

If you have taken out a mortgage loan, the lender will require you to purchase a homeowner’s insurance
policy. Therefore, proof of insurance is required at closing. Even after paying off your mortgage loan, homeowner’s insurance will help you protect your investment against hazards, theft and accidents that occur on your property.

What special homeowner’s insurance issues should I consider before purchasing my home?

Different geographic areas have unique issues that should be considered when looking for a home. Some
general issues to consider include:

  • Is the home located on a flood plain? If so, you will need to purchase flood insurance if you plan to
    take out a mortgage loan.
  • Is the home located in a low-lying area? Homes located in low-lying areas are more prone to flood
    ing, but may not be eligible for flood insurance. You will need to weigh the risks to determine if this
    is a deal breaker for you.
  • Is the home located in a high-risk area for natural disasters, such as hurricanes, earthquakes and
    tornados? While your homeowner’s insurance will cover losses due to these disasters, your
    premiums may be higher the home is located in a high-risk area. Also, even if the insurance cost is
    affordable, you need to decide whether or not you want to live in an area that is prone to
    natural destruction.
  • Is the home located in a hazardous materials area? The ill effects of hazardous materials can last for many years and can affect water and air quality.
  • Does the home meet all building codes and apply to local zoning laws? If not, you may be
    responsible for making the necessary modifications or you may have difficulty with remodeling or
    making additions to the home in the future.

What steps can I take to help lower the cost of my homeowner’s insurance?

The most important step you can take toward minimizing the cost of your homeowner’s insurance is to purchase the right home. You can keep costs down by choosing a home that:

  • Is not located in an area that is prone to natural disasters
  • Is newer and constructed out of sturdy materials such as brick
  • Located near a fire hydrant or fire department

When choosing a homeowner insurance policy, be sure to compare the rates of several insurance companies.
You may also be able to lower your rates by purchasing your homeowner’s insurance policy through the
same company as your car insurance, by obtaining group coverage through a business or alumni association,
or by increasing your home security. Another option is to increase your deductible, but keep in mind that
this will also increase your out-of-pocket costs if you file a claim.

What is a home warranty?

A home warranty protects you against potentially costly problems that are not covered by homeowner’s insurance, such as unexpected repairs on home systems and appliances. Home warranties only provide coverage for a limited amount of time, but they are becoming increasingly popular with homebuyers because
many find themselves a bit strapped for cash for a period of time following a home purchase.

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