Those fixer-upper homes can be a great investment and project for a homeowner, but they can also come with some unique challenges. One of those unique challenges is insuring the home.
Generally, insurance companies shy away from insuring a run-down house in need of major renovations and sometimes those renovations can cause insurance rates to increase.
- Obtaining a home insurance policy for a fixer-upper home can be challenging and expensive due to inherently more risk that the insurer would have to take on
- There are a few different options owners of fixer-upper homes have to obtain insurance coverage depending on their specific situation
- A homeowner can start with a fixer-upper home insurance option and later switch to a standard home insurance policy when repairs are completed
Why is finding a policy for a home in need of repairs so difficult?
Insurance tends to be an overlooked part of the home-buying process. Mortgage lenders typically require the home buyer to purchase some form of homeowners insurance in order to obtain the mortgage, but it usually ends up being a normal part of the process that the homeowner doesn’t think too much about.
Fixer-upper homes can be more of a challenge to obtain insurance coverage for. Why is that? Well, homes in need of major repairs, ones that have been abandoned, or have been foreclosed on usually lead to a higher risk to the insurance provider. Not only is there more risk that peril can cause damage to the home when no one is actually living in the home, but there is also more risk that damage can be caused by renovations of the home as well. This higher risk leads to some insurance companies charging higher premium rates to the homeowner or some insurance companies not even offering any sort of coverage to the homeowner. Luckily a homeowner still has some options in this situation.
What insurance options are available for a fixer-upper home?
What insurance options are available to the homeowner depends on the state of the home. You will need an inspection anyways to get a mortgage loan on the home, so that inspection can be used to determine what condition the home is in and what insurance options may be available to you.
There are five options that may be available to the owner of a fixer-upper home:
- Conventional insurance: The traditional insurance route may be available to the homeowner when only minor repairs are needed and the home can be moved into shortly after closing (typically within 30 days). Depending on the extent of the repairs or if more significant repairs may need to be completed after move-in, the insurance provider may charge a higher premium rate or send the policy out to be reinsured by a third-party insurer that takes on higher-risk homes.
- Builder’s risk: This is the most common form of home insurance available to the owner of a fixer-upper home or a home that is being built. Typically builder’s risk form of coverage works by starting at a lower amount of coverage and lower premium rate and then progressively becoming more expensive and providing more coverage as the home becomes worth more over time as renovations are completed or the home is built. This option is usually most available to those homeowners who have a solid timeline and plan for completing construction or renovations.
- Vacant dwelling: This option is typically available to homes that need some repairs (usually more cosmetic repairs) and the home will not be occupied during the repairs. This form of Home insurance will cover the home for many causes of damage to the home, but will not cover the home for perils such as theft as vacant dwellings are far more likely to have theft occur.
- HO-8 policy: This is a good option for homes that are older and that will be occupied by the homeowner even while repairs may be occurring. Older homes are more prone to many forms of risk and repairs could potentially be more costly than what the home is actually worth. Coverage under HO-8 is far less than under an HO-2 or HO-3 policy, but is a suitable choice for an older home.
- FAIR plan: Some situations may result in essentially no insurance options being available to the homeowner. This can sometimes be the case especially when the homeowner is doing all the repairs themselves or is paying someone in cash to complete renovations. Insurance companies don’t particularly like this type of situation and may not offer any coverage option to the homeowner. In that case, the homeowner’s best and probably only option is to turn to their state’s FAIR (Fair Access to Insurance Requirements) Plan. These plans are offered in most states. The plans vary from state to state and provide very basic insurance, but they can be a better option to the homeowner than nothing at all.
Typically, all of the above options are more expensive than standard home insurance and potentially less encompassing in their coverage but are usually better than nothing.
Am I stuck with one of these options forever?
No, you are not stuck with whatever option you go with when you purchase your fixer-upper home. It is actually encouraged to try to find a standard home insurance policy once repairs, renovations, or rebuilds have been completed and the home is no longer a “fixer-upper”. Trying to get back to a more traditional homeowners insurance policy as soon as possible will save money and provide better coverage to the homeowner than the options above.
Summary
Fixer-upper homes can be great investments for a homeowner but can also cost quite a bit of money in repairs and insurance options. Finding coverage for a fixer-upper home can be much more difficult than in a normal case. Options may be limited depending on the state of the home and how extensive the repairs needed are. There are some options available to the homeowner though, even in the most extreme cases. As repairs become completed, better coverage options will become available as well.
