Having homeowners insurance on your property isn’t just a good bet. VA lenders will require you to have sufficient homeowners insurance in place before you can close on a loan.
The type of policy you need, what it covers and how much it costs can all vary depending on where you’re buying, the age and details of the home and more.
Lenders can also have their own requirements and guidelines for homeowners insurance, which borrowers might also hear called “hazard insurance.”
Homeowners Insurance Basics
Generally, most homeowners insurance policies provide:
- Dwelling coverage for damage to the home
- Coverage for other structures on the property, like a detached garage
- Personal property coverage for items damaged or destroyed
- Liability coverage in case of injuries on your property or damage caused to someone else’s property
But not all disasters and causes of damage will be covered by a basic homeowners insurance policy. Standard policies will typically cover damage from:
Wind or hail
Aircraft or vehicles
Weight of ice, snow or sleet
That’s by no means an exhaustive list. But notice that major damage sources like floods and earthquakes are not typically covered by a standard homeowners insurance policy.
Some VA buyers will be required to obtain a separate flood insurance policy before they can close on their loan. Earthquake insurance is not required for a mortgage.
You can shop around for the best policy and price on homeowners insurance. Some lenders may have recommendations for or relationships with homeowners insurance providers.
VA borrowers will usually need to pay their first year’s insurance premium at or before closing. This is a cost sellers can pay as part of your negotiations regarding VA loan closing costs and concessions. Having a seller pay for or reimburse you for this upfront premium payment would count against the 4 percent cap on seller concessions.
After this first year’s payment, homeowners will typically pay a portion of their annual homeowners insurance premium each month as part of their regular mortgage payment. As a service to homeowners, the lender or servicer will escrow these portions and pay the annual bill for you.
Homeowners insurance premiums can increase or decrease every year, even if you don’t file a claim. Keep an eye on this cost every year, as a premium increase can also impact your monthly mortgage payment.
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Veterans United Guidelines
At Veterans United, we require 12 months’ worth of coverage, and the effective date of the homeowners insurance policy must be before the loan’s funding date.
The policy’s coverage needs to be based on what it would cost to rebuild the home in today’s real estate and building environment, also known as replacement cost, rather than the market value of the home.
We will need a full 12-month “binder” or a declarations page. An insurance binder is basically temporary proof of your insurance policy. This document outlines your coverage and lists our company as a payee (along with the borrower) in the event the home is damaged or destroyed.
The insurance binder can’t have any language indicating your coverage is contingent upon the payment of your premium. If this kind of wording appears, borrowers will need to ask the company to remove it; pay their premium upfront and seek a reimbursement at closing; or get a new binder from another company.
In addition, the binder needs to list the deductible, which can’t be more than 5 percent of the dwelling coverage.
We’ll also need to confirm that wind and hail coverage is part of the policy for buyers in 19 states (Alabama, Connecticut, Delaware, Florida, Georgia, Hawaii, Louisiana, Maine, Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey, New York, North Carolina, Rhode Island, South Carolina, Texas and Virginia). You’ll need a separate policy for wind and hail if you’re buying in one of these states and that coverage isn’t included.
Guidelines and requirements can look different for veterans and service members purchasing condos in a VA-approved development. Talk with a Veterans United loan specialist for more details.