Before you close on the purchase of your new property, it is our recommendation and often a requirement that you need to obtain home and fire insurance. Without insurance, mortgage lenders will be reluctant to give you a mortgage and typically require a binder letter confirming there is insurance on the property at the time of closing.
You may be wondering why – after all, if the house is damaged, aren’t you responsible for the costs of repair as well as paying the mortgage? While the answer to that question is yes, it is regardless important to mortgage lenders to be reassured you have home insurance coverage as they are using the property as security for the loan and want to ensure they will be paid in the event of a major fire, flood or similar disaster that may occur at the property.
When getting a mortgage, you are putting the property up as collateral – as in, if you can’t pay up, the lender will at least have the property to sell to pay off your debt. Now, if you have a pipe that bursts, or a fire, and the house isn’t insured or repaired and the lender is attempting to sell the property, they’re now paying more out of their pocket to try and get a fair market value. Essentially, home insurance reassures the lender that whatever happens, they can get their fair market value of the property.
It is imperative to get home insurance prior to closing and to ensure that electrical work has been properly done, especially for those purchasing older homes. Not only will it reassure your mortgage lender that the property is safe from any potential accidents, it will also give you peace of mind to know what whatever happens, you have your insurance to fall back on and a safe place to live.
Written by Christine Nickel and Nahal Golmohammadi