Why You Need Homeowners Insurance

When it comes to insurance and your new home, ask your builder or his insurer about what exactly he’s covered for and what holes you might have to fill in.

When you finance your new home, your lender will require you to take out a homeowners insurance policy before allowing the mortgage to go through.

Lenders require homebuyers to invest in homeowners insurance to protect the stability of the mortgage by protecting the newly built home.

If there’s a fire, for example, the lender doesn’t want to rely on the borrower using his own money to make the repairs. Rather, it wants to be certain the money will come from an insurer’s deep pockets. That way, it can be pretty confident the repairs will be made.

In addition to lender-mandated homeowners insurance policies, buyers might have to invest in more insurance before closing on their new homes, if the buyer is using a construction-to-permanent loan.

If you are buying in a typical subdivision, you don’t need insurance until you close on your loan because you don’t have an ownership stake in the house until then. Before closing, it’s up to the builder to protect the property from damage and theft.

However, if the builder allows you to start moving in before settlement — say, he gives you permission to store your boat and some personal belongings in the garage — you need insurance because the builder’s policy won’t cover your stuff if something goes wrong, says Laura Adams, senior insurance analyst at InsuranceQuotes.com, a site that matches consumers with agents who want to offer cost quotes. If you bring a friend or relative to the property while it’s under construction, you should think strongly about having liability coverage in place as well. 

Adams advises to ask your builder or his insurer about what exactly he’s covered for and what holes you might have to fill in. You’ll also want to know what level of liability your builder has during the construction stage.

“Even you don’t technically own the property,” she says, “you want to know what your liability is” in case you or someone you know is hurt while visiting the house to see how work is progressing.

Now consider a construction-to-permanent mortgage, or C2P financing. These kinds of loans are normal when the buyer owns their own lot and hires a builder or contractor to construct the house. Some subdivision builders also use C2P financing so they don’t have to take out construction loans themselves. But this type of funding is more typical in custom home situations where the buyer has the land — and possibly their own plans — but needs someone to actually build the place.

When you close on your C2P loan, the lender may want you to have builder’s risk insurance in place to protect against theft and damage. Why? Because as soon as you sign for the loan, you own the house, even though construction has yet to start. With a builder’s risk policy, if someone knocks a wall over, steals the appliances or copper wire, vandalizes the place with spray paint or swipes the builders’ tools, you are covered.

“We always carry general liability and workmen’s comp,” says Kim Hibbs of Hibbs Homes, a custom builder in the St. Louis, Mo., area. “But the lenders we use require builders risk coverage.”

Mike Brown, of American Builder Services in Glen Burnie, Md., also a custom builder, says he requires it even when lenders don’t — “for your own protection.” And he wants it in place for the full amount of the contract price throughout the course of construction.

According to Brown, you both share the risk when something is delivered to the property. If it is left out on the grounds, the builder’s coverage comes into play. But once it is under lock and key, you take ownership, even if it’s not installed. So if the builder stores the appliances in the locked garage and someone steals the refrigerator, your insurer should cover the loss.

“If I let it sit out a while, that’s my fault,” he says. “But once it’s in the house and under lock and key, you as the owner are responsible.”

Adams of InsuranceQuotes.com says that once the doors and windows are in place and the house can be locked, you might want to switch over to standard homeowners policy. But not at the full value of the house until it is completed, and not personal possession protection.

“You don’t need personal possession protection until you start moving in,” she says.

Obviously, this is complicated stuff. Consequently, it is a good idea to speak with your insurance agent about what kind of coverage you’ll need and when.
Lew Sichelman is a nationally syndicated housing and real estate columnist. He has covered the real estate beat for more than 50 years.

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