Do You Have to Have Homeowners Insurance?

Quick Answer

No law requires homeowners to purchase homeowners insurance, but your lender will likely require it as a condition of your loan if you have a mortgage. Even if you aren’t required to have homeowners insurance, it’s a good idea to help protect your investment in your home.

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Buying a house is the largest purchase many people will ever make, so it makes sense they'd want to protect it. Having the right homeowners insurance policy can help cover the costs of expensive repairs when things go wrong, so you're not left with a bill you can't handle. But do you have to have it? The answer depends on whether you have a mortgage.

Do You Need Homeowners Insurance?

When you own a home, expenses can pile up fast—especially after a disaster. Homeowners insurance helps you recover financially from various perils that would otherwise wreak havoc on your pocketbook, such as a storm-damaged roof, stolen possessions or lawsuits from someone who gets hurt on your property. Having adequate coverage makes good financial sense, but the law doesn't require it. However, your lender probably will if you have a mortgage.

Do Mortgage Lenders Require Homeowners Insurance?

Mortgage lenders generally require homeowners to maintain insurance as part of the loan agreement. Why? As long as you have a mortgage, your lender has a financial interest in your property. Homeowners insurance not only protects you, but it also protects them by helping to ensure you're able to make necessary repairs or rebuild—and continue repaying your mortgage.

For example, if you don't have insurance and your house burns down, you're technically still on the hook for the balance of the mortgage. If you can't afford to rebuild and don't make your mortgage payments, the lender can't foreclose on a home that no longer exists. Homeowners insurance protects lenders from financial loss if the property is damaged or destroyed before you pay off your loan.

How Much Home Insurance Do Mortgage Lenders Require?

Lenders typically require homeowners to have insurance policies that cover 80% to 100% of the cost to rebuild the home. The cost to rebuild is not the same as the market value. Rebuilding costs may be more or less than the market value because the market value includes the land on which the property is built and is influenced by other factors such as supply and demand in the local housing market, local crime rates and more.

Risks of Not Having Homeowners Insurance

Although the law may not require you to have homeowners insurance, skipping it could be a mistake. Without adequate coverage, you face the following risks:

  • Financial burden: Without insurance, the financial responsibility for repairing and replacing damaged items falls to you.
  • Inability to make repairs: If you don't have the financial resources available, you may be unable to make repairs.
  • Force-placed insurance: The lender can purchase coverage for the property that you must pay for if you don't buy insurance on your own. These policies typically provide bare-bones coverage to protect the lender's financial interest in your home and cost much more than a traditional policy.
  • Loan default: If you don't have insurance, you're likely violating your loan agreement. Your lender can send your loan into default, which could result in foreclosure.
  • No liability protection: Homeowners insurance doesn't just help protect your physical property; it also helps protect you from lawsuits if someone gets hurt on your property. Without it, you could be on the hook for legal costs and damages the court may award if someone sues you.

What Does Homeowners Insurance Cover?

What homeowners insurance covers depends on the policy, but it typically provides protection from various perils such as fire, theft, vandalism, wind and more. If a covered event damages your home or possessions, your insurance policy will pay to repair or replace them up to the policy limit, once you've paid your deductible. Homeowners insurance generally provides the following types of protection:

  • Structure: Your policy will pay to repair or replace your home and other structures on your property, such as a shed or detached garage.
  • Contents: Protecting the structure of your house is important, but so is protecting everything inside of it. This part of your policy pays to repair or replace items within your home, such as furniture, electronics and clothing, that sustain damage. If you have a lot of valuable items, such as art or collectibles, your basic homeowners insurance likely won't cover their value completely; for this you will need to purchase separate collectibles insurance.
  • Liability: If someone gets hurt on your property, they may sue you for damages. Liability coverage helps pay for the cost of defending yourself in a lawsuit, plus any damages that may be awarded.
  • Additional living expenses: If you cannot stay in your home while it's being repaired, this part of the policy will pay for additional living expenses, such as a hotel stay, until you can move back in.

However, homeowners insurance doesn't cover every possible mishap you could experience. Every policy has exclusions. Unfortunately, 65% of homeowners don't know what their policy covers and what it doesn't, according to a Goosehead Insurance survey.

A standard homeowners insurance policy doesn't cover damage from floods or earthquakes. You need to buy a separate policy for that. You may also be able to purchase endorsements to include coverage for incidents your base policy doesn't insure. It's crucial that you read your policy carefully to know what's covered and what isn't so you can make informed decisions about additional coverage you may want to purchase.

If you have questions, talk to your agent or insurance company directly so there are no unpleasant surprises if you need to file a claim.

How to Save on Homeowners Insurance

The cost of homeowners insurance is on the rise, as average premiums clock in at $1,411, according to the National Association of Insurance Commissioners. Here are seven tips to help you save.

  1. Bundle home and auto policies. Many insurance companies offer discounts to policyholders who purchase homeowners and auto insurance from the same provider.
  2. Shop around. Rates can vary significantly between providers. One of the best ways to ensure you get the lowest price possible is to compare quotes from multiple insurers.
  3. Prioritize safety. You may pay less for coverage if your home has deadbolt locks, smoke detectors or a security system.
  4. Improve your credit. Most states allow insurance companies to include credit-based insurance scores in their rating criteria. People with higher scores typically qualify for lower rates. Not sure where yours stands? Get your free credit score today.
  5. Cover minor repairs yourself. Your insurer may raise your rates after you file a claim. If you need to make a small(ish) repair that would be covered by your homeowners insurance, it may be better to pay for it out of pocket (ideally using your emergency fund or home repairs fund for this expense).
  6. Increase your deductible. A deductible is the amount you must pay before the insurance company covers a claim. In general, a higher deductible results in a lower premium, but it will mean paying more upfront in the event that you have to make a claim. Be sure to weigh these potential costs with the savings on your premiums.
  7. Ask about discounts. Some insurance companies offer discounts for retirees or for signing up for services such as autopay or paperless billing.

Protect Your Property

If your lender requires you to maintain homeowners insurance, you get to choose the policy you purchase. Skimping on coverage to save money may sound like a good idea, but it could cost you later on. A better option is to buy the most comprehensive policy you can afford while looking for ways to save on your premium.

If you're lucky enough to own your home outright, you could skip the coverage—but it's not a good idea. Remember, homeowners insurance doesn't just protect your lender. It protects you, too. Without it, you'll be on the hook for out-of-pocket expenses if disaster strikes.