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Buying a home is one of the most significant purchases you’ll make, and it comes with many factors on the checklist, including insurance. Although this type of coverage isn’t required within California, some lenders mandate it for security. The objective is to keep your home investment in good shape, whether you intend to sell the property or pass it down to other generations. Continue reading to learn more about prepaid homeowners insurance.
Benefits for Borrowers
This requirement can avoid financial burdens and keep your mortgage affordable. Once you sign for the loan, the property becomes your responsibility. Therefore, having homeowners insurance will give you peace of mind, whether it comes to repair costs or replacing personal items.
The amount of the prepaid policy will vary depending on the borrower’s credit score, the location, and the current condition of the property. For example, if you live in an area more prone to natural disasters, your insurance rate could be higher. Again, this will vary, which is why you should speak with your lender and a qualified insurance company before making a selection.
Lender Protection
Most lenders require prepaid homeowners insurance at closing to reduce the risk of a default. This protects the property from various risks, such as buyers not making payments or the property experiencing damage.
The number of months the lender collects money for at the closing will vary. However, it is generally between six to twelve months. The amount collected is deposited into an escrow account. At the due date, lenders will use the funds in that account to pay the current insurance provider.
It’s best to discuss this requirement before the closing so you know the premiums collected for homeowners insurance, along with other factors, including interest rates and property tax.
Misconceptions
Some buyers think closing costs are the same as prepaid costs. This is a big misconception, and it can lead to negative impacts. Prepaid expenses must be provided up front, and they generally apply to monthly mortgage expenses. In contrast, a closing will often pay the administrative fees for the processed loan.
Another misconception is who pays for these expenses. Prepaid costs are always covered by the buyer, but a seller often covers some of the closing expenses.
Proof
Before the closing is complete, a lender generally requires documentation, such as a declaration page. The page lists the buyers’ names, the property description, and other policy details. Lenders then determine if the property protection they require has been met.
Speak with insurance providers to secure the coverage you deserve, which you can use as proof at closing. Representatives will review all requirements and ensure you have sufficient insurance to cover the purchase and protect your home against financial issues.
Knowing what to expect at closing can ensure you have the right coverage for your needs. For reliable, affordable home insurance, San Diego homeowners know they can trust Altra Insurance Services. We also provide renters, commercial, motorcycle, and car insurance. Request a free quote by calling one of our friendly agents today.