Owning a home comes with a lot of expenses, from upfront closing costs to ongoing maintenance and repairs. With so many costs, you may look for ways to save money. But if you’re wondering, “Is homeowners insurance required,” the answer depends on your situation. Plus, these requirements may change as you pay off your mortgage.
Is home insurance required?
From a legal standpoint, homeowners insurance is not required by state or federal law. This is different from auto insurance, where every state has minimum requirements for how much coverage you’re required to carry before you can hit the road.
However, just because home insurance isn’t legally required doesn’t mean it’s not in your best interest to purchase a policy. Homeowners insurance comes with a host of benefits, including comprehensive coverage for a number of unexpected losses that occur on your property.
Do mortgage lenders require insurance?
There are no homeowners insurance laws, but you will be required to purchase and maintain a policy if you have a mortgage. Mortgage lenders require home insurance as financial protection for the investment they’ve made in your home. If major damage occurs to your house and it can’t be repaired, you would still be responsible for the remaining mortgage balance. With a homeowners insurance policy in place, your lender is ensured a payout in the event some type of catastrophe occurs.
You may also be required to add on flood coverage if your home is located in a designated flood plain. This information is usually disclosed when you buy the house, but you can also search by your address through online FEMA flood maps.
When you take out your home insurance policy, you may see a loss payee clause. This means that both you and the lender receive reimbursement for any damage caused when you file a claim. The lender would then confirm the damage before disbursing the funds for you to oversee the repair process.
Other reasons you need homeowners insurance
On top of your lender being financially protected by a homeowners insurance policy, you get a lot of protection as well. In fact, there are four key areas of financial protection included in a standard home insurance policy.
Dwelling coverage. This part of your policy covers the structure of your home. If it sustains any kind of damage from a covered event, such as fire, wind or vandalism, you can file a claim and be reimbursed for repairs.
Personal property. In addition to the actual building, homeowners insurance also covers your belongings inside. This even includes items stolen from your home. You’ll be covered up to a certain amount and may need a policy rider for items with high values (like jewelry or electronics).
Personal liability. If someone ever gets injured on your property, you could be sued to cover their medical expenses. Your homeowners insurance offers personal liability coverage, which will pay the costs you’re found responsible for. It also applies to damage to someone’s property that happens at your home.
Additional living expenses. Another aspect of homeowners insurance is additional living expenses (ALE). You’ll get your living expenses (like hotel and meals) reimbursed if you have to stay somewhere else while your house is being repaired. For instance, if a tree falls over and goes through your roof, you likely won’t be able to stay in the home. ALE coverage makes sure you’re not knocked off your feet financially during this period.
Frequently asked questions
What happens if you don’t have home insurance?
There are a few issues that can arise if you don’t have home insurance. If you have a mortgage, keeping a policy in place is likely a requirement of your loan agreement. When they find out you’re no longer covered by your previous insurance company, they may find a new insurer on your behalf, which could be much more expensive. Alternatively, the lender could send your mortgage into default since not having a policy would be a violation of your loan agreement.
You can still change your homeowners insurance policy anytime you want. Just make sure the old and new policies overlap so you don’t have any gaps in coverage.
Do you need homeowners insurance at closing?
Yes, if you’re getting a mortgage, you’ll need to provide proof of your policy at the time of closing. You can either bring a copy of the policy to closing or send it ahead of time. Your lender will help you navigate the process to make sure everything is received in time — otherwise, your closing could be delayed.
Your lender may also require that you pay your annual premium at the time of closing. Check your estimated closing cost statement to see if this is part of the expenses included.
How much homeowners insurance do lenders require?
In most cases, a lender requires full replacement cost coverage, meaning the value of your policy would be enough to rebuild your house in case of total loss. However, if you’ve paid down a sizable chunk of your mortgage, you may be able to drop the amount down to the equivalent of the loan balance. Just know that you would be responsible for covering any damage beyond that amount.
Your insurance company will help give you an estimate of your home based on its construction, value and current building costs.