Homeowners Insurance Guide for First-Time Homebuyers

Putting a down payment on your first home is undoubtedly exciting, but there’s a lot to figure out before you get the keys. Home insurance is one of those new things to learn about, and it’s part of the cost of homeownership.

Home insurance helps protect your investment. If you need a mortgage, like most homebuyers, your lender will require you to buy homeowners insurance to protect its financial interest in the property. If a covered event badly damages your house, home insurance helps protect you and your lender from financial loss.

Your age and experience don’t affect home insurance rates, so purchasing coverage as a first-time home buyer won’t work against you. But it’s important to know the other factors that can affect the cost of your homeowners insurance. Here’s what you need to know to find the best, most affordable home insurance coverage.

What is homeowners insurance?

Home insurance provides financial protection against losses. A standard homeowners policy typically includes dwelling coverage for your home’s structure, personal property coverage, liability protection, and additional living expenses coverage.1

Depending on your needs and new home, you’ll need one of these policies: an HO-2 (broad form), HO-3 (special form), HO-5 (comprehensive form), or an HO-8 (older home form).

The most common is HO-3, an open-peril policy that insures owner-occupied, single-family, or multi-family homes.2 A peril is an event, like a fire or storm, that can cause damage to your house. Open-peril policies cover any peril unless it’s specifically excluded, while named-peril policies like HO-2s only cover perils written in the policy.

Why first-time homebuyers need homeowners insurance

Most mortgage lenders require proof of homeowners insurance before you can close on the house. You also have to maintain home insurance as long as you have a home loan. If your coverage lapses, your insurer will notify your lender, which could take action against you.

A home is a large asset, so not insuring it against accidents, damage, and theft or protecting yourself from liability is a huge financial risk, according to the Insurance Information Institute (Triple-I).

7 best insurers for first-time homebuyers

No single homeowners insurance company is best for all first-time buyers because every homeowner has different insurance needs. Numerous factors affect your homeowners insurance rates, so shopping around and comparing quotes will help you find the best policy and rate.

These are some of the highest-rated and most broadly available home insurers in the U.S., so if you don’t know where to start, these companies are worth a look.

Amica: Best for customer service

American Family: Best for young homeowners

Farmers: Best for environmentally conscious homeowners

Allstate: Best for broad availability

Nationwide: Best for optional coverages

State Farm: Best for bundling

Chubb: Best for high-value homes

Parts of a home insurance policy

Standard home insurance policies typically include the same core components, though homeowners can purchase higher limits or additional coverages to expand protection. These are some standard elements:

What homeowners insurance covers

It’s smart to understand what your home insurance policy covers so you can buy additional coverage if you need more protection. For example, your insurer will only pay for repairs when a covered event causes the damage. This is what a standard HO-3 policy commonly includes, according to Triple-I:

• Fire (including wildfire) and lightning

• Windstorm and hail

• Theft and vandalism

• Explosions and falling objects

• Riots and damage from vehicles

• Volcanic eruption

• Weight of snow, ice, or sleet

• Accidental water overflow from household or municipal system

• Freezing of household system

What homeowners insurance won’t cover

Home insurance is essential financial protection, but it doesn’t cover all possible damage. Homeowners insurance completely excludes some perils, like flooding, while other exclusions — like damage from wind — may depend on where you live. For example, if you live on the coast you may need to purchase separate wind insurance or higher limits on your existing policy. 

Here’s what an HO-3 policy typically won’t cover:

• Flooding

• Earth movement (earthquakes, landslides, and sinkholes)

• Routine wear and tear

• Neglect

• Pest damage

Home insurance costs for first-time homebuyers

Home insurance costs vary widely, especially based on location and your home’s condition. Your premium also depends on your dwelling coverage limit and chosen deductible.

Here are average annual home insurance premiums from 10 insurance companies for a home insurance policy with $300,000 of dwelling coverage.

Factors that affect home insurance costs

Your insurer considers many factors to set your rates. Here are some factors that affect your home insurance premium.

How much homeowners insurance do first-time homebuyers need?

You should have enough insurance coverage to rebuild your home from the ground up if the worst happens, replace your personal belongings, reduce costs if you’re unable to live in your home, and protect yourself from liability.

Your insurer and lender will help you assess the right dwelling coverage limit, and you can make an inventory of your belongings to determine the right personal property coverage amount. Liability limits typically start at $100,000, but you can also purchase higher limits.

Below are some important concepts and coverages to understand as you consider the right policies for you.

Replacement cost vs. actual cash value

When you’re considering coverage, especially for your belongings, look for whether you’ll have replacement cost or actual cash value coverage. Replacement cost policies pay for repairing your home or replacing your possessions without deducting any depreciation. Actual cash value policies factor in depreciation to claims payout amounts.

For example: Say a covered event damages your five-year-old refrigerator. Replacement cost coverage will pay for a new refrigerator to replace what you lost. Actual cash value coverage will pay you the current value of that old refrigerator, which may not be enough to purchase a replacement.

Optional coverages to consider

These coverages may be essential to protect your home appropriately or just a smart backup coverage for added protection.

• Flood insurance: Home insurance doesn’t cover flood damage, but you can buy flood insurance from a private insurer or the National Flood Insurance Program. If you have a federally backed mortgage and live in a Special Flood Hazard Area, federal law requires you to purchase flood coverage. And if you have a conventional mortgage, your lender may also require you to buy flood insurance if your home is in a high-risk area.

• Earthquake coverage: Home insurance doesn’t cover “earth movement” like earthquakes and landslides, but you can get coverage as an add-on or separate policy.

• Water backup coverage: If a clogged pipe or broken sump pump causes a backup, you’ll need this coverage to pay for the water damage. You’re more at risk for a water backup if your area’s sewer system is old or if you have an older home and a basement.

• Service line coverage: This covers repairing or replacing broken utility lines, such as water and gas pipes, and buried power or fiber optic lines.

Home insurance terminology to know

Insurance is full of enough jargon to make your head ache while you read through your policy documents. Below are a few important terms to understand.

Deductibles

Your deductible is the amount you pay toward an insured loss.4 Say a fire or storm causes $10,000 of damage to your home, and you have a $1,000 deductible. You’ll pay $1,000 and receive a claims check for $9,000. A homeowners insurance deductible applies each time you file a claim.

Policy limits

A policy limit — or an insurance or coverage limit — is the maximum amount an insurer will pay for a covered claim. For example, if a fire damages your belongings and you have a $150,000 personal property limit, your insurer will pay up to $150,000 to replace your items.

Exclusions

Exclusions are events, losses, or property that your home insurer won’t cover. Examples include flood or earthquake damage, wear and tear, a car, or a certain breed of dog.

Mortgage escrow

A mortgage escrow is a kind of bank account that you fund each month to cover your home insurance, property tax, and mortgage payments.5 Your lender will manage the account and pay those bills with your escrow account funds. Your lender may require you to keep a “cushion” amount in your account.

First-time homebuyer insurance FAQs