Most mortgage lenders require homeowners insurance before closing — it's not optional when you have a loan. As a first-time buyer, you need to understand what the policy covers and doesn't (floods and earthquakes are excluded from standard policies), how to set the dwelling coverage amount correctly (replacement cost, not market value), and how to comparison-shop before the policy binds at closing.
Virtually every mortgage lender requires that you have a homeowners insurance policy in force at closing — with the lender named as an additional insured (mortgagee). This isn't optional when you carry a mortgage. The CFPB's homebuying resources explain the lender's interest and how insurance is typically escrowed into your monthly payment.
The most common first-timer mistake is setting dwelling coverage at the home's purchase price or market value. You need enough coverage to rebuild the home at current construction costs — not what the land is worth, not what you paid. Construction costs are driven by local labor and material prices, which diverge significantly from market value in many areas. The Insurance Information Institute (III) recommends using your insurer's replacement cost estimator or a licensed appraiser to determine the correct dwelling coverage amount.
Flood damage is excluded from every standard homeowners policy. If you're in a FEMA-designated Special Flood Hazard Area (SFHA), your lender will require separate flood insurance through the National Flood Insurance Program (NFIP) or a private flood insurer. Even outside high-risk zones, approximately 20% of flood claims come from moderate-to-low risk areas, per FEMA. Earthquake damage is also excluded and requires a separate policy or endorsement.
Start shopping for homeowners insurance as soon as your offer is accepted — ideally 2–3 weeks before your closing date. Lenders need the declarations page ("dec page") in advance. Get quotes from multiple licensed carriers; your state insurance department (reachable via USA.gov/insurance) can provide a list of licensed carriers in your state. Compare coverage terms, deductibles, and claim-paying history alongside price.
First-time buyers often assume their homeowners policy covers all natural disasters. It doesn't. Flood damage requires a separate policy. If you're purchasing in a flood zone or earthquake-prone area, budget for those additional policies and confirm coverage is in place before closing.
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