Is Homeowners Insurance Required?
Your mortgage company will require you to have home insurance. And it's a good idea to have home insurance even if your home is paid off.
Home insurance helps you pay to restore or replace your home after it's been damaged or destroyed. Your mortgage lender will require you to prove you have enough home insurance coverage to fully protect your home, and its investment.
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Do you need homeowners insurance?
Home insurance is required by mortgage companies and lenders.
When you get a mortgage, the bank will require that you have a home insurance policy when you buy the house and keep the insurance policy the whole time you have the mortgage.
However, the government doesn't require home insurance like it requires car insurance. This means that if you don't have a mortgage on your home, you aren't legally required to have home insurance.
Is home insurance required? | |
|---|---|
| If you have a mortgage | |
| If you don't have a mortgage |
Should I get homeowners insurance if it's not required?
Yes, even if you aren't required to have a policy, a homeowners insurance policy could protect your finances if something were to happen to your home.
If your home was damaged by an incident such as fire or vandalism, having an insurance policy would mean you wouldn't have to pay for the repairs yourself. Instead, you could file an insurance claim and get money from the insurance company to help pay for repairs.
After a catastrophe where your home is completely destroyed, your home insurance policy will protect the financial equity you built up. The money you invested in your home won't be lost because the insurance payout will help you recover your losses.
Why do mortgage lenders require homeowners insurance?
Mortgage lenders require homeowners insurance to protect their investment in your home and property.
If your home is damaged or destroyed, the mortgage company doesn't want to have a stake in something that is no longer valuable.
Having home insurance is also good for homeowners for several reasons. If your home is damaged or destroyed, you don't want to have the full debt of your mortgage without a place to live or with a property that's of little value.
For example, let's say a fire destroys your home. If you didn't have home insurance and were unable to pay to rebuild the house, the bank's loan would have no value. In this case, your lender's investment would be completely lost.
But if you had home insurance, the insurance company's payout could be used to either rebuild the home or pay off your loan, depending on the terms of the mortgage.
What kind of home insurance is required?
Mortgage companies differ in their insurance requirements. Some will say they require hazard insurance, which is the part of a home insurance policy that covers the building. Hazard insurance is included in all home insurance policies, along with coverage for your belongings.
If your home is in a flood zone, a mortgage company may require that you purchase flood insurance in addition to your home insurance policy. This is a separate type of policy that you would need to buy, though some home insurance companies can also give you a flood insurance policy.
What happens if you have a mortgage and don't have home insurance
A lapse in home insurance means that you have defaulted on your mortgage by failing to meet its requirements.
If you stop paying for home insurance after you receive your mortgage, usually you'll get a reminder after the first missed payment. Your coverage will lapse after 30 days or multiple missed payments, depending on the insurance company.
This means you will be in default on your mortgage. Your lender will assign you to a force-placed insurance policy, which is typically much more expensive and has less coverage than a standard policy.
It's often difficult to get a new insurance policy after you’ve had a force-placed policy. And if you are unable to pay for your lender-placed policy, you could face foreclosure.
How to avoid a lapse in home insurance coverage
- If you are worried about missing a payment, contact your insurance company to see if it will allow payment deferrals due to unforeseen circumstances, such as losing your job.
- If you have trouble remembering to pay your bill on time, set up autopay through your insurance company or ask your lender to bundle your insurance payment into your mortgage through an escrow account.
- If you receive a notice about a missed payment after paying your bill on time, there might be an error with your bank or autopay settings. Contact your insurer or bank to clear up the mistake. Set a calendar reminder to check your next bill to make sure the next payment goes through correctly.
Why should you get homeowners insurance even when it's not required?
If you don't have a mortgage and choose not to get home insurance, you are taking a big financial risk.
Without home insurance, you would have to pay out of pocket to repair any damage to your home or its contents. For example, you could have to pay $10,000 to repair your roof if a tree falls on it. Or if your home is destroyed, you would be responsible for the full cost of rebuilding.
An insurance policy can help protect you from losing a lot of money. It can also give you peace of mind in knowing that you'll be covered if something is damaged or destroyed.
Other benefits of home insurance
Home insurance has benefits that go beyond the dwelling coverage that protects your home's structure. Policies also cover your belongings and protect you from lawsuit costs.
- Personal property coverage pays to repair or replace your belongings if they're stolen or damaged. It even covers your belongings when you're traveling.
- Personal liability coverage pays for damages if you're sued because of any injuries or property damage you caused. For example, this part of your home insurance policy pays for injuries if someone slips on your driveway or damage if your tree falls on your neighbor's house.
- Loss of use coverage pays for your additional living expenses if your home is uninhabitable after an event covered by your policy. For example, it would pay for you to stay in a hotel if your home was damaged by a fire.
- Coverage for other structures pays for damage to sheds, detached garages, fences and other buildings that are not attached to your home.
What home insurance coverage should I get?
When you buy a home insurance policy, you'll typically have to consider what you want coverage for. You'll also need to consider the deductible amount you can afford to pay if you need to make a claim.
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What risks you want covered: A standard home insurance policy will pay for damage from things like fire, vandalism or a tree falling on your home. You can add on coverage to your home insurance policy so that it will cover things like sewer backups, mold or identity theft. You can purchase a separate policy to get coverage for floods, earthquakes or sinkholes.
- How much coverage you want: The amount of dwelling coverage included in your policy is usually based on your mortgage or the value of your home's structure. But you can decide how much coverage you want for your belongings, any exterior structures like sheds, and liability. You can also get higher coverage limits for expensive belongings such as jewelry, art or firearms.
- Types of coverage: Your payout after a claim will be affected by the type of coverage your policy has. Replacement coverage is more expensive, but it will pay to replace or rebuild what's been damaged. Actual cash value coverage is cheaper, but it will pay out less because it considers the age of something when calculating a claim payment.
Frequently asked questions
Can you have a mortgage without homeowners insurance?
All lenders require home insurance when you get a mortgage. If you don't get a homeowners insurance policy or you let your policy lapse, your lender will set up force-placed insurance instead. These policies are much more expensive and don't offer you as much coverage, so it pays to make sure you keep your home insured yourself.
Do I need homeowners insurance for a rental property?
There is no law that requires homeowners insurance for a rental property. However, if you are the landlord and you take out a mortgage for the rental property, your lender will require you to be insured. Depending on the property's seasonality and the length of time you rent it out, you might be required to have landlord insurance.
Do you need homeowners insurance before closing?
Yes, you need to have homeowners insurance before closing on a property if you are taking out a mortgage. Lenders require all buyers to have proof of insurance, called an insurance binder, at closing in order to prove their investment is insured.