Your home is a huge investment, and put simply, homeowners insurance helps you protect that investment. Like many pieces of the homeownership journey, shopping for insurance can be complicated. It combines a number of different concepts, and more often than not, what you’ll read can feel dense and overwhelming.
At Better.com, we believe in making every aspect of homeownership simple. With that in mind, let’s review:
- What homeowners insurance is
- Why mortgage lenders require homeowners insurance
- The ins and outs of the most common policies, the HO-3 and HO-6
- How Better Cover, our homeowners insurance agency, can help you find the right policy for your loan
Homeowners insurance is a type of property insurance that covers losses and damages that occur to or on your property. Your homeowners insurance policy can provide the funds to repair or replace damaged property, and protect you from certain liabilities. While it may seem like a sunk cost when things are going well, it’s value is undeniable when things go awry.
Why mortgage lenders require homeowners insurance
Your mortgage lender puts a major financial investment into your home by providing funds for the property upfront, so it’s natural that they are interested in protecting your property as well. To safeguard their investment, your lender will require homeowners insurance so that in the event of a disaster that destroys the home, they don’t lose the remaining loan amount. It also benefits you. In that worst-case scenario that your home is destroyed, you won’t have to continue paying the mortgage for a home that no longer exists.
Common Policies: HO-3 and HO-6
The most common homeowners insurance policy is the Basic Homeowners Insurance Policy, formally known as Homeowners Policy Special Form 3 - but you’ll know it as HO-3 for short. Second to HO-3 is HO-6. HO-6 is a “walls in” only policy that is structured similarly to HO-3, but covers condominiums and co-ops. It’s important to understand what these policies both cover and don’t cover.
Both policies comprises of six distinct coverages that help keep money in your pocket in case of damage to your property or personal belongings, or exposures to certain liabilities:
- Coverage A: Dwelling coverage - protects your home, including the structure and any permanent fixtures like plumbing and cabinetry - the stuff that’s physically part of, and attached to, the house
- Coverage B: Other Structures coverage - applies to structures on the insured property, but not a part of the home itself (i.e. a detached garage or a shed)
- Coverage C: Personal Property coverage - covers all of your personal property. It covers your property wherever it’s located. Anywhere in the world, not just in your home!
- Coverage D: Loss of Use coverage - applies when your insured premises are considered uninhabitable due to things like a fire or tornado. It covers living expenses as well as fair rental value, if you’re renting out the property.
- Coverage E: Liability coverage - covers costs (up to a certain limit) for damages in which you are considered “at fault”... and typically provides legal defense.
- Coverage F: Medical Payments to Others coverage - Often called “Good Neighbor” coverage, this pays for the medical bills of third parties injured on your property, regardless of fault.
When you receive your insurance quote and policy, make sure your agent walks you through each of these coverages. Each one will have a defined coverage limit - the maximum the insurance company will pay for a certain type of damage - and it is important to understand and adjust these limits as needed.
Your agent will also walk you through perils. Perils are events or incidents that cause damage or loss to your property. Your HO-3 policy will cover your home on what is known as an “open perils” basis. That means it will cover anything EXCEPT for what it specifically lists it won’t cover. Confusing? Yes. But the policy will also include “named perils - fire, theft, etc. - that it will cover you against.
To put it into perspective, if you need to make a claim, your insurance company will pay to either repair or replace your damaged property so long as it is the result of a listed “named peril” or a peril explicitly not excluded in writing.
Better Cover can help you fulfill homeowners insurance requirements for your mortgage
Better Cover is Better.com’s in-house insurance agency, allowing you to shop for policies online right alongside your mortgage application with Better Mortgage.
Better Cover’s integration with Better Mortgage allows Better Cover to quickly serve you up insurance quotes from digital carriers like Lemonade, Hippo, and traditional carriers based on the specifics of your loan file and your personal insurance needs.
Once you lock your rate with Better Mortgage, sign in to explore your personalized insurance quotes through Better Cover.