5 Big Insurance Mistakes First-Time Homebuyers Make

By Dan Rafter

If you need a mortgage loan to purchase a home, you’ll also need to invest in a homeowners insurance policy. Lenders require that you have one of these before they’ll approve you for a loan. And when you’re buying a home for the first time? Getting that homeowners’ insurance policy seems like just one more hurdle.

A homeowners’ policy, though, provides important protection. It can cover the costs of rebuilding should your home be destroyed. If a burglar steals your valuables, a policy can help you replace your most important possessions.

Unfortunately, too many first-time homebuyers rush the process of buying a policy. This can cost them later when their policies don’t provide enough protection in case their residence is damaged or their possessions stolen.

Here are some of the biggest mistakes first-time buyers make when purchasing homeowners’ insurance. Avoid them if you don’t want to take a financial hit later.

1. They look for the cheapest option

John Bodrozic, founder of El Dorado Hills, California-based digital home management company HomeZada, said it's little surprise that first-time buyers make homeowners' insurance mistakes. The process of buying a home can be overwhelming for those who've done it multiple times. It's even more stressful for those with no experience.

Buying a home is expensive, too, and first-time buyers often are strapped for cash. Because of this, they might look to slash their costs on homeowners' insurance, something that could hurt them should fire damage their new home or a thief steal their most valuable possessions.

"They look for the cheapest insurance, which probably leaves them under-insured," Bodrozic said.

Most homeowners' insurance policies do cover owners' home itself and their personal property. But the personal property coverage usually has a limit that is often too low. Policies might also have exclusions for high-value items that need to be insured separately.

"This often means that the first-time homeowner is under-insured for high-value items," Bordrozic said. "Perhaps even the cap is not enough to cover everything they own."

2. They don't understand what their policy doesn't cover

Sam Barnsley, co-founder of New York City-based insurance company Waffle, said that it's rare that homeowners, no matter how many times they've bought a home, will read their entire homeowners' insurance policy.

But too many first-time buyers don't even do the basic research to find out what their policy will or will not cover, Barnsley said.

"It is helpful to do some online research about the key pitfalls and things to look for," Barnsley said.

It helps, too, for first-time buyers to ask their insurance brokers questions about their policies. They might discover that purchasing additional coverage can help provide them with important protection.

Some buyers, for instance, might want to invest in extra coverage if they own expensive jewelry or antiques. Others might need to invest in earthquake protection. Those buyers who don't ask their insurers what isn't covered might find themselves facing a big financial hit if a disaster happens and they failed to buy extra insurance to cover it.

3. They skip the home inventory

Insurance companies recommend that clients take a home inventory of their valuables. Having this list is important should a home and its contents be damaged or destroyed. The inventory, which should include photos of owners' most expensive items, can make it easier for owners to tell their insurers what they lost.

Doing a home inventory, though, does take time. So homeowners often skip this step, Bodrozic said.

"Most first-time homeowners forget to do this, and they won't find out until it is too late the importance of this simple task," he said.

As hurricanes and wildfires become more common threats, taking an inventory of possessions has become an ever more important job for homeowners. It's not one they should skip. Insurance companies will want to see these inventories, Bodrozic said.

"Not having a home inventory is a huge mistake," he said.

4. They overspend on upgrades to qualify for small discounts

First-time homeowners might know that certain additions to their home -- everything from a monitored alarm system to an impact-resistant roof -- could inspire their homeowners' insurance provider to give them a discount on their homeowners' insurance.

But Alina Freyre, realtor associate with the Brown Harris Stevens in Key Biscayne, Florida, said that the discounts that come with these purchases aren't always large enough to justify investing in the additions.

"One of the biggest mistakes that new homeowners make is upgrading certain items in their home, like an alarm system, and overpaying, thinking it will get them a huge discount," Freyre said.

5. They don’t start their search for a policy soon enough

Stefan Tirschler, underwriting and product manager with Square One Insurance Services in Phoenix, said that too often first-time buyers rush into purchasing homeowners' insurance.

That can lead to paying too much for not enough coverage.

"One of the most common mistakes is leaving insurance to the last minute," Tirschler said. "Home insurance is not a thing that you can just out and buy, no questions asked. It's not uncommon to be contacted by a stressed-out new homeowner the day before closing who just realized that their mortgage funds -- and keys -- won't be released until they can provide proof of home insurance."

When buyers do apply for homeowners' insurance, they need to provide the insurance company important details about their residence's age, heating systems, wiring and plumbing. Armed with this information, providers can determine premiums and what kind of coverage they can offer. This often means that homebuyers need to review their purchase documents to find these details.

This takes time, and waiting until the last minute often means that homeowners will simply accept any policy they can get. They don't leave themselves enough time to research more extensive coverage. They don't leave enough time to shop around for lower prices.

"Try to look for home insurance at least a week in advance," Tirschler said. "That way, you'll be able to thoughtfully choose a provider without a time crunch."