There’s a lot to think about when you buy your first home, but don’t let homeowners insurance slip your mind. You’ll need it to get your mortgage approved, and finding a low rate can take some of the pressure off your household budget. Here’s what any first-time home buyer should know about getting homeowners insurance.
In this article
When should a first-time homebuyer get insurance?
As a first-time homebuyer, start shopping for homeowners insurance as soon possible after the seller accepts your offer.
This gives you enough time to compare quotes from multiple companies and fine tune the details of your coverage without feeling rushed.
When you decide on a policy, you have to give your lender’s contact information to your insurance agent. The insurance company lists your lender as your policy’s mortgagee.
Your policy does not have to take effect until your close date, but lenders typically need your proof-of-insurance documents a few days before then.
If you are buying a home in a high-risk flood zone, your lender will also require you to get flood insurance.
If you’re paying for your first home in cash, you don’t have to meet a lender’s deadline to get insurance. However, scheduling your policy to take effect on your close date protects your investment in the home from day one.
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How much is homeowners insurance for first-time homebuyers?
Whether you are a first-time buyer or have gone through the process many times, the average cost of homeowners insurance nationwide is $1,903 a year, or $159 a month.
However, several factors determine the price you pay, including:
- The age, location and construction features of your new home
- The home’s safety and security features
- Your insurance history and, in most states, your credit
- Any discounts you may be eligible to receive
Since each company weighs these factors differently and offers different discounts, shopping around can save you money. Consider starting with your current car and/or renters insurance provider and compare their quotes to those you get from other companies.
Since bundling a homeowners policy with car insurance is likely to save you money, ask for quotes that show rates for both policies.
Which insurance companies are best for first-time homebuyers?
Based on a combination of low rates, customer-service ratings and financial strength, State Farm, Allstate and Erie are the best large insurance companies for first-time homebuyers.
State Farm
$1,888 a year, or $157 a month
Satisfaction rating829 out of 1,000 by J.D. Power
Financial strengthRated A++ by AM Best
A combination of low rates and reliable customer service has helped State Farm become the nation’s largest home insurer. The company’s generous discounts for bundling home and auto insurance make its rates more affordable.
Allstate
$1,734 a year, or $145 a month
Satisfaction rating815 out of 1,000 by J.D. Power
Financial strengthRated A+ by AM Best
Allstate, the nation’s second-largest home insurer, has slightly lower rates than State Farm, but its overall satisfaction score is also lower. Allstate’s Claim-Free Rewards feature provides a discount for avoiding claims. Its Claim RateGuard feature protects you from a future rate increase if you do file a claim. Both may save you money down the line.
Erie
$1,471 a year, or $123 a month
Satisfaction rating827 out of 1,000 by J.D. Power
Financial strengthRated A+ by AM Best
Despite only being available in 12 states and the District of Columbia, Erie is the nation’s 11th-largest home insurer. It also has a financial strength rating that matches some larger competitors. Erie’s guaranteed replacement cost coverage assures you’ll have enough coverage to rebuild your home in the event of a total loss.
As an alternative to large national companies, smaller regional companies are often good choices for budget-conscious first-time homebuyers.
For example, Vermont Mutual has the lowest average home insurance rates in Maine and Massachusetts, while Mutual of Enumclaw is cheapest in Idaho and Oregon. In many states, Farm Bureau affiliates offer lower rates than some of their larger, better-known competitors.
Why financial strength and customer service ratings matter
Price is important when it comes to insurance for your first home, but financial strength and customer service ratings also matter.
A strong financial strength rating reflects a company’s ability to pay claims and remain solvent.
Additionally, most lenders require your home insurance company to meet at least one of the following rating thresholds for financial strength:
- B or better from AM Best
- A or better from Demotech
- BBB or better from Kroll Bond Rating Agency
- BBB or better from S&P Global
Customer service is important, especially if you ever have a claim.
J.D. Power’s overall satisfaction index rating is a good source for checking on an insurance company’s customer service standards. The ratings are based on customer surveys rating home insurance companies on factors such as policy offerings, price and claims satisfaction.
Among companies available to the general public, American Family has the highest J.D. Power rating for overall satisfaction. USAA’s satisfaction score is highest among all home insurers, but USAA is only available to current and former members of the military and their families.
| Company | Satisfaction rating (on a 1,000-point scale) |
|---|---|
| American Family | 842 |
| State Farm | 829 |
| Erie | 827 |
| Auto-Owners | 825 |
| Segment average | 819 |
| Nationwide | 816 |
| Allstate | 815 |
| Chubb | 809 |
| Liberty Mutual | 805 |
| Progressive | 801 |
| Travelers | 794 |
| Farmers | 792 |
| USAA* | 884 |
| Source: J.D. Power 2022 U.S. Home Insurance Study. *Only available to current/former military and their families. | |
How much insurance do I need for my first home?
Lenders typically require your insurance policy to have a dwelling limit that matches your home’s replacement cost value, which is the estimated cost of rebuilding it, in the event of a total loss.
Most insurance companies use software to estimate your home’s replacement cost, based on its specifications, building materials and quality grade.
Your job is to provide the insurance companies you contact for a quote with accurate information about the home. You can find most of the information you need in your inspection report, if you have it, and by looking up your home on your county assessor’s website.
Lenders often don’t place requirements on the other coverages in your insurance policy, which are typically offered in default amounts that you can adjust. Here are key considerations for each of them:
- Other structures: Covers damage to detached buildings on your property, such as sheds, non-attached garages and fences. If you have a cottage or converted garage, you may need an increase from your insurance company’s default limit.
- Personal property: Covers your appliances, furniture, electronics, recreational gear, clothing and other possessions. Consider adding a personal property rider for high-value items like jewelry and fine art.
- Personal liability: Covers injuries and property damage you may cause to others. Your personal liability limit should match or exceed your net worth. Consider purchasing an umbrella policy for additional protection.
- Medical payments: Covers medical treatment for a guest visiting your property, regardless of fault. The default limits, which range from $1,000 to $5,000, are typically enough for most people.
Do I pay for homeowners insurance before closing?
For most mortgages, you don’t have to pay for homeowners insurance until you close on your purchase.
The payment for your first full year of homeowners insurance is typically added to your closing costs.
The cost of subsequent coverage is folded into your monthly mortgage payments, which are also known as PITI, an acronym for principal, interest, taxes and insurance. For example, if your homeowners insurance company charges $1,200 a year, this amount is listed with other closing costs in your loan estimate and closing documents.
After you close, your monthly PITI payments will include a $100 charge to cover the anticipated premium for the following year’s home insurance coverage, based on that $1,200-a-year policy.
If your down payment is less than 20% of your home’s purchase price, the monthly cost of mortgage insurance, which is different from homeowners insurance, is also added to your PITI payments.
Most lenders set up an escrow account for your tax and insurance payments. The escrow company distributes funds to the appropriate parties, including your home insurance provider for annual renewals.
Lenders also typically adjust your PITI payments from year to year to account for changes in your insurance and tax rates.
If you opt out of escrow or purchase your home with cash, you pay the insurance company directly, usually before your coverage takes effect.
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