Editor's note: As a special feature for April, TheStreet.com offers a 20-part series on virtually everything about real estate. This installment is Part 12. Once you find your dream home and figure out how you're going to pay for it, the next step is to get homeowner's insurance. This is an insurance policy covering the structure of your house and other structures on the property, such as a shed or fence, as well as the contents of your home, such as your furniture and other personal belongings. Homeowner's insurance may also cover you against lawsuits in the event that you or a family member cause bodily injury to someone else or damage someone else's property. It's important to note that ordinary homeowner's insurance, also known as hazard insurance, does not cover damage caused by floods or earthquakes. This can't be emphasized enough. Even though the insurance declarations for hazard policies specifically state that any damage caused by flooding is not covered, many people who suffered damage in Hurricane Katrina expected to have their flood damage covered, only to have their claims denied. Flood insurance is sold exclusively through the National Flood Insurance Program, found at
FloodSmart.gov . Most private insurance companies will sell you a separate earthquake policy, except in California, where the California Earthquake Authority provides this coverage. For most people, homeowner's insurance is not optional. If you take out a mortgage, it is very likely that the lender will require proof of insurance at closing. In fact, lenders prefer you to escrow your homeowner's insurance premium and property taxes as part of your monthly mortgage payment. This way the lender or loan servicer will pay your annual insurance premiums and property taxes and adjust your loan payment accordingly.
Your lender is required to inform you if the home you are purchasing (or refinancing) is in a flood zone. If it is, the lender will require you to obtain flood insurance coverage sufficient to replace the structure if it is destroyed by flood, with a maximum requirement of $250,000. According to the Insurance Information Institute, the average cost of coverage for a home in a flood-prone area is $400 a year. But even if you live outside a flood zone, you should consider getting coverage. While federal law stipulates that the lender must require sufficient flood insurance coverage if your home is in a flood zone, it is up to the lender to decide how much hazard coverage will be required. Know Your Servicer After closing, the bank or mortgage company that made your loan will likely sell it to another institution or sell the loan-servicing rights. You might be told at your loan closing who the new servicer will be. You might also be informed later on that your loan has been sold or that the servicer has changed. In any event, it is very important that you know who is servicing your loan and who is responsible to pay your annual insurance premiums and property taxes. Make sure the servicer pays your insurance premium on time. Call the servicer at least two weeks before any insurance premium is due, and ask if the payment has been sent. Then call and ask your insurance agent to confirm that the premium payment has been received. If the servicer fails to pay the premium on time, the insurance company might drop your policy, and you might pay a lot more to secure an equivalent policy with another insurance company. This is especially true of you live in an area prone to hurricanes or other natural disasters.
It is also critical that you inform your insurance agent if your loan servicer changes. This may happen more than once, if your loan is sold or if your lender contracts with another company to service the loan.