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Is homeowners insurance required? The answer might surprise you.
Homeowners are not required by law to have insurance coverage.
However, mortgage lenders require proof of home property coverage to approve financing, and some homeowners associations (HOAs) may also require certain types of coverage.
There are many other good reasons to maintain a homeowners insurance policy even if you’ve paid off your mortgage or purchased with cash. Home insurance coverage protects one of your most valuable assets from natural disasters, shields your personal belongings from financial loss, and insulates your net worth and other assets from personal liability.
Let’s explore a few scenarios where you’d be required to have the financial protection of homeowners insurance, what home insurance companies require for a standard homeowners insurance policy, and what happens if you don’t have homeowners insurance coverage.
Read more: What is homeowners insurance?
Lender homeowners insurance requirements
As a homebuyer financing the purchase of a home, you’ll be required to take out a homeowners insurance policy to protect the lender’s investment. The mortgage company uses the value of your property as collateral to secure the loan. In the event you are unable to pay back the loan, the lender will repossess the home in good condition to recover their investment.
Lenders generally require that the policy covers the full cost of replacing the home, referred to as the replacement cost. For example, if your home would cost about $500,000 to rebuild from the ground up, lenders would require you to hold $500,000 in dwelling coverage.
In some cases, lenders may also ask for additional coverage or endorsements that extend beyond a standard home insurance policy. For instance, you may have to purchase a flood insurance policy in certain regions.
Read more: The best mortgage lenders of 2024
What’s required to qualify for a homeowner insurance policy?
Keep in mind that some insurers specialize in protecting certain types of property, and you may have to shop around to find a good fit. The requirements for securing homeowners insurance for a specific piece of real estate typically include:
Insurable interest
This sounds like complicated legal jargon, but insurable interest means you have a financial stake in the property. You can’t be the policyholder on a home that isn’t in your name or doesn’t belong to you.
Owner occupancy
A standard homeowners policy requires homeowners to live full-time in the home. If the property is not the owner’s primary residence, such as a seasonal home or a rental unit, you’ll need to consider a different type of insurance like vacation home insurance.
Standard construction
While custom builds aren’t necessarily an issue, you may have to search for an insurer willing to extend a policy to certain kinds of homes. Older or historic homes, log homes, tiny homes, mobile homes, and other specialty construction may be challenging to insure because materials would be difficult to replace in the case of property damage.
Residential use only
Although you can add a business use endorsement to some home insurance policies, many insurers avoid this scenario. Commercial use such as farms are considered high-risk due to equipment, livestock, and other complications that might exceed available liability coverage limits.
Certain criminal convictions prohibited
Some insurance companies have exclusions on policyholders who have certain criminal convictions such as arson, fraud, and other crimes involving intentional damage or vandalism.
Insurance history
A history of lapsed insurance coverage, a low insurance score, or excessive claims could affect your ability to secure home insurance or result in higher insurance premiums. If the home itself has previous insurance claims that indicate a structural problem, the insurance company could consider the home uninsurable.
When you’re shopping for home insurance quotes, be prepared to provide information about who will live at the house, your insurance history, the home’s structure, any renovations or safety improvements, and how the home will be used.
What happens if you don’t have homeowners insurance?
While you might balk at how much homeowners insurance costs, the reality is not having it could cost you much more in the long run. If your home is damaged, you’ll have to pay for repairs out of pocket, replace your personal property, and front additional living expenses while your home is repaired.
And in the event of someone being injured on your property, a homeowners policy can cover some medical expenses and defer personal liability so your other assets are financially protected.
If you’re worried about the financial strain home insurance might place on your budget, talk with an insurance agent about ways to lower your premiums, including raising your deductible or adjusting coverage limits as necessary.
Do home equity loans and HELOCs require homeowners insurance?
Yes, home equity loans and home equity lines of credit (HELOC) usually require homeowners insurance for the same reason mortgage lenders require it. For any loan that uses your home as collateral, home insurance is required to protect the lender’s investment.
In the event of something catastrophic, such as a windstorm or wildfire, a homeowners policy can cover repairs or rebuilding costs and keep the value of the home you’ve borrowed against intact.
Read more: HELOC vs. home equity loan: Tapping your equity when rates are high
FAQ
1. Should I get homeowners insurance if I don’t have a mortgage?
You can own a home without having home insurance, but it’s not in your best financial interest. In fact, the Consumer Federation of America estimates that about 1 in every 13 homes in the U.S. is uninsured, leaving homeowners with trillions of dollars in personal financial risk.
2. Is homeowners insurance included in a mortgage?
Homeowners insurance premiums will be included in your mortgage payment if you have an escrow account. This means when you pay your mortgage every month, a portion is set aside to pay for homeowners insurance and property taxes. If you don't have an escrow account, you may have to pay your homeowners insurance premium at closing and then annually.
3. Is homeowners insurance different from mortgage insurance?
You may be required by your lender to take out mortgage insurance, but this is not the same as home insurance. Mortgage insurance, sometimes called private mortgage insurance (PMI), is a separate policy that is required when your down payment on a property is less than 20% of the loan.
