First-Time Homebuyer's Guide to Home Insurance

Why Your Lender Requires Homeowners Insurance

Before you reach the closing table, your mortgage lender will require proof of homeowners insurance. This is non-negotiable. The lender has a financial stake in your property — often hundreds of thousands of dollars — and they need assurance that their investment is protected if disaster strikes. Without an active policy in place, your loan will not close.

But homeowners insurance is not just a box to check for your lender. It is the financial safety net that protects what is likely the largest purchase of your life. Understanding what you are buying — and what you are not — will help you make smart decisions rather than simply grabbing the cheapest policy available.

What Homeowners Insurance Actually Covers

A standard homeowners insurance policy (known in the industry as an HO-3 policy) is built around four core coverages. Each serves a distinct purpose, and together they form a comprehensive shield around your home and finances.

Dwelling Coverage (Coverage A)

This is the backbone of your policy. Dwelling coverage pays to repair or rebuild your home's physical structure — the walls, roof, foundation, built-in appliances, and attached structures like a garage — if damaged by a covered peril. Covered perils on a standard policy include fire, windstorms, hail, lightning, vandalism, and several others.

The critical number here is your dwelling coverage limit. It should reflect the cost to rebuild your home, not the price you paid for it and not the real estate market value. Rebuilding costs depend on local labor rates, material costs, and the square footage and features of your home. Your insurer or agent can run a replacement cost estimate to help you land on the right figure.

Personal Property Coverage (Coverage C)

Everything inside your home — furniture, electronics, clothing, kitchen appliances, sporting goods — falls under personal property coverage. A standard policy typically sets this limit at 50% to 70% of your dwelling coverage. So if your dwelling is insured for $300,000, your personal property coverage might be $150,000 to $210,000.

Two important details to understand:

• Actual Cash Value vs. Replacement Cost: ACV policies deduct depreciation, meaning your five-year-old laptop is valued at what a five-year-old laptop is worth today, not what a new one costs. Replacement cost coverage pays to replace items with new equivalents. Opt for replacement cost if your budget allows.
• Sub-limits on valuables: Most policies cap payouts on categories like jewelry ($1,500), electronics ($2,500), and firearms ($2,500). If you own a $5,000 engagement ring, you will need a scheduled personal property endorsement to fully cover it.

Liability Coverage (Coverage E)

If someone is injured on your property and you are found legally responsible, liability coverage pays for their medical bills, legal fees, and any court-awarded damages. The standard starting limit is $100,000, but most insurance professionals recommend at least $300,000 to $500,000. The cost difference between $100,000 and $300,000 of liability coverage is often just $20 to $40 per year.

Additional Living Expenses (Coverage D)

If a covered event — say a kitchen fire — makes your home uninhabitable, this coverage pays for temporary housing, restaurant meals, and other increased living costs while your home is being repaired. Policies typically cap this at 20% of your dwelling coverage. On a $300,000 dwelling policy, that gives you $60,000 for temporary living expenses.

What Homeowners Insurance Does Not Cover

This is where first-time buyers are most often caught off guard. Standard homeowners policies explicitly exclude several significant risks:

• Flooding: Whether from a hurricane, heavy rain, or a swollen river, flood damage requires a separate flood insurance policy. Even if you are not in a high-risk zone, roughly 25% of all flood claims come from moderate- and low-risk areas. A separate policy typically costs $500 to $1,500 per year.
• Earthquakes: You will need a separate earthquake policy or endorsement, particularly important in California, the Pacific Northwest, and parts of the Midwest.
• Maintenance and wear: Your insurer will not pay for a roof that deteriorates over 20 years or pipes that corrode with age. Insurance covers sudden and accidental events, not gradual decline.
• Sewer and water backup: Damage from backed-up drains or sump pump failure is excluded on most standard policies but can be added as an endorsement for $40 to $80 per year.

How Much Coverage Do You Need?

Start with these benchmarks and adjust based on your specific situation:

1. Dwelling: Full replacement cost of your home. Do not confuse this with the purchase price, which includes land value. A $400,000 home might cost $280,000 to rebuild — or $450,000, depending on construction type and local costs.
2. Personal property: Conduct a home inventory. Walk through each room and estimate the replacement cost of everything you own. Most people are surprised to find they own $50,000 to $100,000 worth of belongings.
3. Liability: At minimum $300,000. If your net worth exceeds your liability limit, consider an umbrella policy that adds $1 million or more in coverage for roughly $150 to $300 per year.
4. Deductible: A $1,000 deductible is standard. Raising it to $2,500 can lower your premium by 10% to 15%, but make sure you can comfortably afford that amount out of pocket.

How to Get Your First Policy

1. Start early. Begin shopping for insurance as soon as your offer is accepted — ideally 30 days before closing.
2. Get at least three quotes. Prices for the same coverage can vary by 30% to 50% between carriers.
3. Consider an independent agent. Unlike captive agents who represent one company, independent agents shop multiple carriers on your behalf.
4. Bundle for savings. Insuring your home and auto with the same carrier typically saves 10% to 25% on both policies.
5. Review the policy before closing. Confirm the dwelling limit, deductible, and any endorsements you requested. Verify that your lender is listed as the mortgagee.

What Drives Your Premium

• Location: Proximity to fire stations, wildfire risk, hail frequency, and local crime rates all influence pricing.
• Home characteristics: Age, construction type, roof material and condition, square footage, and the presence of a pool or trampoline all factor in. A new roof can reduce your premium by 15% to 25%.
• Coverage amounts and deductible: Higher coverage limits and lower deductibles increase premiums.
• Credit-based insurance score: In most states, insurers use a credit-based score to help set premiums. Maintaining good credit helps keep insurance costs down.
• Claims history: Both your personal claims history and the property's claims history affect pricing.

The national average for homeowners insurance is approximately $2,200 per year, but costs vary dramatically by state and property.

Final Advice for First-Time Buyers

Do not treat homeowners insurance as an afterthought that gets sorted out the week before closing. The right policy at the right price requires comparison shopping, and the decisions you make now will affect your finances for years. Take the time to understand your coverage, ask questions, and work with an agent or carrier who explains things clearly. Your future self — the one who never has to wonder whether a claim will be covered — will thank you.