No one buys a home expecting burglary, fires, or flooding. The damage caused by these unexpected events is often an overwhelming expense that could easily drain a homeowners' reserves. That’s why mortgage lenders typically require home insurance before closing on a new home. Long story short, homeowners insurance is required in most situations. Here’s what you need to know:
What is homeowners insurance?
When you purchased your home, your lender likely requested that you provide proof of homeowners insurance ahead of the closing. Typically, the payment for that insurance is included in the escrow (a separate account that pays your property taxes and insurance) of your monthly mortgage payment alongside your property taxes and mortgage insurance.
This type of insurance policy protects your home against interior and exterior damage as well as the belongings inside your home. After a covered event, such as falling objects, fire, lightning, or civil unrest, your insurance provider cuts you a check for the damage so you can have it repaired. In some cases where the property is fully destroyed, the insurer may even pay to rebuild the home and replace damaged belongings.
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Why do lenders require home insurance?
When a bank lends you money to buy a home, they’re making an investment in the property you’ve chosen. If all goes well, you’ll repay the full amount of the mortgage loan plus interest, which equals a profit for them. However, if you default on the mortgage, your home becomes collateral for the bank to recover the money it lent you.
Your mortgage lender has a vested interest in ensuring your property remains valuable even after unanticipated situations. If the home is significantly damaged or decimated, it impacts your lender’s return on their investment. They require homeowners insurance to reduce the risk of losing money while also protecting you from the same unforeseen occurrences.
What is mortgage insurance vs home insurance?
Both home insurance and mortgage insurance are part of your monthly mortgage payment. While they sound similar, they don't provide the same coverage. If you’ve made less than a 20% down payment on a conventional mortgage, your lender likely requires private mortgage insurance or PMI. This only protects your lender if you stop making mortgage payments; it doesn't protect you. Home insurance protects both you and your lender.
Use our tool, in partnership with Bankrate, to compare rates from different home insurance lenders.
What does home insurance cover?
Homeowners insurance (aka hazard insurance) consists of multiple coverage types that could help in various circ*mstances. There are four areas that most home insurance policies cover as a general standard:
- Dwellings (physical home structure)
- Personal belongings
- Liability
- Additional living expenses
1. Dwellings
Dwelling coverage applies to damage that happens to the internal and external structure of your home. It compensates you for repairs or rebuilding in the event of:
- Hurricanes
- Hail, Ice, Snow, Sleet
- Fire/smoke
- Lightening
- Theft/vandalism
- Falling objects
- Explosions
Dwellings could also cover qualifying detached structures on your property, but that depends on your policy. More disasters or events could also be covered within your specific insurance policy, so you’ll want to read through your insurance documents carefully.
2. Personal belongings
Your furniture, equipment, clothing, and electronics are items that a home insurance policy would reimburse you for if they were damaged or destroyed in a disaster. Generally, insurance covers 50% to 70% of the value of these belongings. Valuable possessions like jewelry, art, and collectibles could need additional coverage.
3. Liability coverage
If someone were injured on your property, you would be personally liable for legal costs, medical bills, and other expenses without the protection of home insurance. This covers the cost of legal protection and even damage created by your pets.
4. Additional living expenses
If the effects of a catastrophe render your home unlivable, this form of coverage takes care of costs such as:
- Hotel bills
- Meals
- Storage space
The limits on this coverage vary depending on policy but it’s typically 20% of your dwellings coverage.
Related Content
- The Basics of Buying Homeowners Insurance
- Delaying Repairs Jeopardizes Home Insurance Policies
- Cheapest Home Insurance: How to Find the Best Policy
FAQs
You need enough home insurance to completely rebuild your house and replace all your belongings. You should get a replacement cost homeowners policy. Don't stop with a standard homeowners policy. Make sure you have all the extra coverage you may need if you live in disaster-prone areas.
Do you really need home insurance? ›
Though not a legal requirement, many mortgage lenders insist on home insurance and there are lots of reasons why it is good to have it. Structural issues, burglaries, fires and other unfortunate events can happen, and they can be very expensive, making home insurance a prudent choice.
What should you not say to homeowners insurance? ›
Avoid admitting fault or underestimating damages as this might lead to lower compensation or even denial of your claim. Honesty is crucial when dealing with an insurance adjuster, so avoid providing false information which can lead to serious consequences like claim denial or legal repercussions.
What is the 80 20 rule for home insurance? ›
The 80% rule dictates that homeowners must have replacement cost coverage worth at least 80% of their home's total replacement cost to receive full coverage from their insurance company.
Why is it so hard to get homeowners insurance? ›
Living in a high-risk location, having hazardous home features, home maintenance issues, your home's history of insurance claims, and more can be reasons an insurance company may determine a house to be uninsurable.
What are the cons of homeowners insurance? ›
Cons of Home Insurance:
- Cost: One of the primary drawbacks is the cost of home insurance. ...
- Deductibles: Home insurance policies often come with deductibles, which means you need to pay a certain amount out of pocket before the insurance coverage kicks in.
After you pay off your mortgage, you'll probably want to continue to have a homeowners insurance policy. While your mortgage lender can no longer require you to carry home insurance after you pay off your mortgage, it's up to you to protect your investment.
Is it smart not to have homeowners insurance? ›
Homeowners insurance will offer ongoing financial protection
Will all the money and care you've invested in your home—and life—it's advisable to guard against financial risk and always keep a homeowners policy in force.
What is the danger of not having homeowners insurance? ›
If your mortgage lender requires it and discovers your home isn't insured, it could initiate foreclosure, resulting in the loss of your home. Or the lender might simply force you to get homeowners insurance by getting new coverage for you and adding it to your monthly mortgage payments.
What is the most important thing in homeowners insurance? ›
Make sure you're covered for the right amount – your home insurance policy should cover the full value of your home in case of damage or destruction. When it comes to home insurance, you want to make sure you're getting the right amount of coverage.
Insuring your home to its full replacement value will help avoid significant out-of-pocket expenses that could eat into your savings and alter your estate plan. In addition, one should also consider the home's contents, other structures on the property, additional living expenses, liability, and more.
What is the rule of thumb for homeowners insurance? ›
The 80 percent rule in homeowners insurance means that you must insure your home for at least 80 percent of the replacement cost for an insurer to cover the damages.
What is the appropriate amount of insurance that you should have on your house? ›
Your dwelling coverage should equal the replacement cost of your house, which is the amount of money it would take to build a replica of your home. At the bare minimum, you should definitely have replacement cost coverage (or RCV) for your home, which is what pretty much all standard policies offer anyway.
What happens if you cannot get home insurance? ›
If you're unable to get a policy through the standard market, you may be able to obtain coverage through your state's FAIR (Fair Access to Insurance Requirements) plan. A FAIR plan is a state-run program designed to provide home insurance to homeowners that may be too risky for standard home insurance companies.
What states are hard to get homeowners insurance? ›
In places including California, Florida and Louisiana, some homeowners are finding it nearly impossible to find an insurance company that will cover their property. Others have seen their premiums climb so high that they can no longer pay.
What happens if your home is uninsurable? ›
The Bottom Line
If serious issues exist with the home or property, the FHA will consider the home uninsurable. Borrowers would need to contact private insurers to cover the property, or a 203K loan could be used to make the necessary repairs. U.S. Housing and Urban Development.
What is the point of home insurance? ›
Homeowner's insurance pays for losses and damage to your property if something unexpected happens, like a fire or burglary. When you have a mortgage, your lender wants to make sure your property is protected by insurance.
Why don't people have home insurance? ›
Sharon Cornelissen, director of housing at the Consumer Federation of America and co-author of the report, stressed the financial vulnerability of consumers who cannot afford homeowners insurance. “Many consumers are struggling to afford rising premiums and must go without homeowners' insurance,” Cornelissen said.
Is it really necessary to have mortgage insurance? ›
Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get. Typically, borrowers making a down payment of less than 20 percent of the purchase price of the home need to pay for mortgage insurance.
What happens to a mortgage if homeowners insurance is cancelled? ›
Key Takeaways. Failing to maintain homeowners insurance can breach your mortgage terms, resulting in penalties, mortgage recall and potential financial challenges. Without coverage, lenders may impose lender- or force-placed insurance, which is a costly alternative to standard home insurance policies.
