Do You Have to Have Homeowners Insurance?

Senior Couple Planning will and trust funds

When you own a home, expenses can pile up fast—especially in the event of a disaster. For this reason, being properly insured is important. Although you're not legally obligated to have homeowners insurance, mortgage lenders almost unanimously require it to protect their investment. After all, when things go wrong, the right policy will cover the costs so you're not left with a bill you can't handle.

Is Homeowners Insurance Mandatory?

Homeowners insurance helps you recover from acts of peril that would otherwise wreak havoc on your pocketbook, such as roof damage caused by a storm, belongings being stolen from your home or medical bills that result when someone is hurt on your property. There is no federal or state law that requires homeowners to have homeowners insurance, however the lender you work with will almost certainly require it the entire time your home is covered by a mortgage loan.

While money from any claim payouts will go to you, the homeowner, the policy also works to the benefit of the lender. Most crucial to the lender is that you're able to pay for necessary home repairs. If you didn't have insurance and the expenses were outside your means, the property might fall to ruin and rapidly lose value. If a home's market value falls below the value of the loan, the lender is put in a negative financial position.

Therefore, the lender will not just expect you to have a homeowners insurance policy when you buy the home, but will keep tabs on your payments. If you fall behind, the insurance company will alert the lender, which will then contact you. At that stage you'll have two options: Get back on track with your current insurance company or get insured with a new company. If you don't, the lender has the right to foreclose on the property.

Be aware that homeowners insurance is different from mortgage insurance. While homeowners insurance is designed to cover the costs of what can happen in and around your property, mortgage insurance protects the lender if you were to stop sending your mortgage payments. If you default on your loan, the mortgage insurer pays the lender. Not every buyer needs mortgage insurance, though. It is usually only necessary when your down payment is less than 20% of the purchase price. When you reach that figure, you can usually drop it.

What Does Homeowners Insurance Cover?

What homeowners insurance does and doesn't cover depends on the policy, but in general, it will offer the following types of coverage:

  • Home structure: To pay repairs and replacement costs if the property is damaged or destroyed by fire and smoke, wind, hail or lightning, water, vandalism or theft.
  • Liability protection: To protect you legally and financially if someone is hurt on your property.
  • Personal belongings: For items that are stolen or damaged (up to a certain value limit).
  • Alternative living expenses: To pay for the cost of living somewhere other than your home if your property has been damaged by an insured event.

There are plenty of exclusions to what most homeowners insurance policies will cover. These frequently include:

  • Damage caused by floods and earthquakes: If you want those covered, you'll usually need a separate policy.
  • Routine wear and tear: Homeowners insurance won't pay out for things like interior and exterior painting, electrical issues and broken appliances.
  • Losses due to certain other reasons: Losses due to war, government seizure or destruction, infestation, pollution and any intentional damage is typically not covered.

How Much Does Homeowners Insurance Cost?

There are few major factors that determine the cost of homeowners insurance policy. The most weighty is the state you live in. According to a study published last year by the National Association of Insurance Commissioners, the average premium cost for the most common type of homeowners insurance in 2017 was $1,211. However, by state, the highest average for a policy in 2020 is Louisiana, at $1,968. Oregon, on the other hand, has the least expensive coverage, averaging just $677.

Your credit-based insurance score may also be a consideration. These scores, such as Attract™ scores developed by LexisNexis® Risk Solutions and FICO's credit-based insurance scoring model, are designed to predict the likelihood that you will file an insurance claim. Credit-based insurance scores, like traditional credit scores, focus on your past activity, such as payment history, credit utilization ratio and delinquent accounts. Using such scores to adjust the cost of a policy is legal at the federal level, but some states restrict their use for homeowners insurance policies. Currently, these include California, Maryland, Massachusetts and Oregon.

The deductible is another factor that can affect your premium. The higher it is, the lower your premium will be. Most insurers offer a minimum deductible of $500 or $1,000. A higher deductible may make for more affordable payments, but you risk having to come up with more cash out of pocket before the insurer pays out if you file a claim.

Because homeowners insurance can be a major line item in your budget, take steps to reduce the cost without sacrificing proper coverage:

  • Improve your credit reports and scores. If you live in a state where insurance policies can be credit-contingent, review your credit reports before pursuing a policy. If your report contains accounts in collections, past-due accounts or excess revolving debt, that negative information may be dragging down your insurance scores. Take action to get caught up on your payments, reduce your debt and pledge to make all payments on time going forward.
  • Raise your deductible. Because low deductibles usually result in high insurance premiums, consider raising that threshold if you feel comfortable handling a large deductible.
  • Shop around. Many companies provide homeowners insurance, so be sure to get several quotes before deciding on one.
  • Seek discounts. Insurers typically offer policy discounts if you pay your annual premium in full up front, or for bundling it with other policies, like auto insurance.

A homeowners insurance policy might be required, but it's something you have some control over. Go for the most comprehensive policy you need and can afford, and then review the policy with your insurer annually so you know you're getting the best for your current situation. Before you do, obtain a free copy of your credit report and FICO® Score from Experian. If your creditworthiness has improved, you'll want to point it out, especially if the policy you have was based on your previous credit rating.