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Buying a home can be a long and stressful process. You have to think about the location, the type of house you’re going to buy, your budget, and whether you’re going to build or buy. And if you’re going to build, you have to keep a close eye on construction to ensure that everything goes according to plan.
Although there’s a lot to worry about, there’s a crucial part of home buying that you should never forget: homeowner’s insurance. This is especially important if you intend to work from home as an entrepreneur.
The Need for Financial Protection
Homeowners’ insurance provides you with financial protection against disasters, accidents and theft. These days, insurance is seen as a need rather than a luxury, especially if your house is situated in a disaster-prone area. And even if there’s a small chance that these unfortunate events happen to your home, their costs are astronomical.
For example, the recent California wildfires cost affected residents an average of $400,000, according to property data firm CoreLogic. This cost is higher than before because labor and materials cost significantly more than they were two years ago.
The annual income of the average American is only $48,672. It’s nearly impossible for the everyday homeowner to pay for disaster costs without borrowing a large amount of cash from lenders and banks. As such, it’s vital for you to prepare for the worst with proper home insurance coverage.
Here are factors to consider when shopping for one.
Your Credit Score
No matter which company you consult for insurance, they’ll review your credit score before they approve your policy. Your credit score is a value between 300 to 800 that determines how responsible a person is at paying off their loans and bills. This value is often provided by the Fair Isaac Corporation (FICO) in the US.
If you’re immigrating from another country, like the Philippines, the credit score determined by your local fintech company may not be considered valid in America. You’ll need to figure out your FICO score through credit reporting companies like Experian and TransUnion.
For a FICO score to be considered good by most firms, it needs to have a value of 700 and above. If you want to improve your credit score, you need to ensure that you’re paying all your bills, from loans to utilities, on time. You should also refrain from maxing out your credit card. The better your financial decisions look on paper, the better your chances at getting your application approved.
The Type of Insurance Coverage
A standard homeowners’ insurance policy covers damage to your home, damage to your stand-alone structures, repairs or replacement of damaged or stolen belongings, additional living expenses while your house is being repaired, liability if you injure someone on your property, and medical payments for treating someone that may get injured on your property. The different types of insurance policies are split into the kinds of perils they include and exclude. HO-4 is excluded, as it’s meant for renters.
- HO-1 – This is the most barebones policy that companies offer. It only covers your home’s structure. It excludes liability, additional living expenses, and personal property coverage. Plus, it only covers your property from specific perils like explosions, theft, vandalism, volcanic eruption, smoke, riots, windstorms and hail, lightning, fire, and aircraft and vehicle damage.
- HO-2 – A step up from HO-1, this policy covers both your home and your belongings. It covers the same perils as the HO-1 but with additions like an accidental overflow of water or steam, falling objects, weight from sleet, snow, and ice, breakage and burning of household systems, and freezing of HVAC system and pipes.
- HO-3 – This is the most popular policy, as it provides everything needed for standard coverage. It also comes with open perils coverage, which means your home is protected from everything apart from a few exceptions like defective construction or maintenance, animal damage, pollution, wear and tear, theft, flood, earthquakes, government actions, and foundation issues. However, you can always add these as riders for an additional fee.
- HO-5 – This is considered to be the most comprehensive home insurance policy. It provides standard coverage and has higher limits for expensive items like jewellery. It also has exclusions similar to HO-3. Other possible exclusions under HO-5 include war, intentional loss, nuclear hazard, mold, and rodent infestations.
- HO-6 – HO-6 is made specifically for condo unit owners. It offers standard coverage and has policies that protect your condo’s common grounds. You may also be paying for the building’s overall insurance through your HOA fees as well.
- HO-7 – This is for mobile or manufactured homeowners. It covers structure, belongings, medical payments, additional living expenses, and liability. It also hasnamed perils policy that includes riots, theft and vandalism, smoke, explosions, fire, lightning, and more.
- HO-8 – This is meant to protect homeowners with materials that are difficult to replace and wiring and plumbing systems that are hard to repair. It has the standard coverage options for named policies like damage from vehicles and aircraft, lightning, fire, explosions, smoke, hail, vandalism, theft, and riots.
Your homeowner insurance is one of the most important parts of your home buying journey. Even if you live in a relatively safe neighborhood, you’ll never know when disaster will strike. Make sure you have a good credit score for your application. And once it gets approved, review your policy options to get the peace of mind you deserve.
