What Does Homeowners Insurance Cover?

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Homeowners insurance is one of those expenses you might hate paying for—until you need it. Most mortgage lenders require clients to purchase homeowners insurance before they take out a loan, and while coverage varies from policy to policy, it generally provides you with financial protection for perils or risks.

Is Homeowners Insurance Mandatory?

Homeowners insurance is a form of coverage that protects your home and belongings from loss or damage. While you aren't legally obligated to carry it, if you're taking out a mortgage, most lenders will require you to purchase homeowners insurance.

That's because the lender makes a large investment in your property when you get a mortgage to buy a home. If your home burns down or is otherwise damaged while you are paying on the loan, homeowners insurance helps protect the lender from financial loss.

It's common (but not usually required) for homeowners insurance premiums to be rolled into your monthly mortgage payment. Your payment goes into an escrow account each month, and your lender pays the insurer on your behalf.

Just like with other forms of insurance, homeowners insurance comes with a deductible. If you file a claim, you'll pay the deductible amount, after which your insurance will kick in and the insurer will pay the covered amount above that.

What's the Difference Between Homeowners Insurance and Mortgage Insurance?

The names may sound similar, but homeowners insurance and mortgage insurance are very different types of financial products. The short version: Homeowners insurance protects you and your property, while mortgage insurance protects your lender if you can't make your loan payments.

If you take out a conventional mortgage and make a down payment of less than 20%, the lender considers the loan riskier because you have minimal equity in the home. In this case, the lender will require you to purchase mortgage insurance. If you default on the loan, the insurer pays the lender.

On a conventional loan, once you reach 20% equity in the home, you can usually cancel your mortgage insurance. If you take out a government-backed FHA loan, you have to pay mortgage insurance for the life of the loan if you make a down payment under 10%.

Homeowners insurance, on the other hand, isn't related to your mortgage. It's a way of reducing your (and your lender's) financial risk in case your home or belongings inside it are damaged or stolen. You pay for coverage, and if a covered incident occurs, you can file a claim and the insurer will cover the cost.

What Is Covered Under Homeowners Insurance?

Most standard homeowners insurance policies offer these four basic types of coverage, according to the Insurance Information Institute:

  • Liability protection
  • Home structure
  • Personal belongings
  • Additional living expenses

Liability coverage protects you legally and financially if someone is hurt on your property or you or your family members unintentionally cause injury or damage to another person or their property. For example, if someone slips on your wet kitchen floor and severely hurts themselves, or your dog bites a neighbor in front of your house, your policy may help pay for their medical bills and any legal action that results from the injury.

Your policy will also pay the cost to repair or replace your home if it is damaged or destroyed by:

  • Fire and smoke damage
  • Wind, hail or lightning
  • Water, such as from a freeze or related to mold (but not from a flood)
  • Vandalism or theft

These perils and more, depending on your policy, are usually covered for your home and sometimes for detached structures on your property, such as a garage, tool shed, gazebo or fence. Personal items lost in these instances are also typically included in your policy, as are items stored off-premises.

Homeowners insurance also typically includes additional living expenses coverage, which pays for the cost of living somewhere other than your home if it's been damaged by an insured event.

What Isn't Covered Under Homeowners Insurance?

Certain perils and disasters are not covered by standard homeowners insurance policies. These include floods and earthquakes, which require separate policies if the homeowner wants coverage. In some flood-prone areas, flood insurance is required, according to FEMA, though it's a separate policy from your homeowners insurance.

Homeowners insurance also doesn't cover routine wear and tear. If this type of coverage is important to you, you could purchase a home warranty that helps cover these types of wear-and-tear expenses, such as broken appliances or electrical issues. Intentional loss is also not covered by homeowners insurance.

Also, be aware that while valuables such as jewelry and furs are covered by homeowners insurance, there's a limit on liability for these types of items, according to the Insurance Information Institute. So if you have a diamond ring worth $5,000 that's stolen in a burglary, but your liability for individual pieces is only $1,500, you will only receive a fraction of what it's worth from your insurer. If you own valuables and want to make sure you're covered if anything happens to them, you can either increase your policy's liability limits or take out a floater policy that covers losses your homeowners insurance does not.

Increase Your Chance of Getting Approved for a Mortgage

If you're planning to buy a home soon, your credit score will be a huge factor in determining whether you're approved for a mortgage and with what interest rate and terms. It's smart to make strides to improve your credit before you apply for a mortgage to help increase your chances of a lender saying yes—and to make sure you get the lowest interest rate possible. To see where your credit stands, you can get your free credit score and report from Experian.

Normally your phone and utility bills don't count toward your credit score, but with the free Experian Boost®ø, they can. If your credit could use a little improvement, consider signing up to potentially increase your score before applying for a mortgage.

Learn More About Homeowners Insurance Coverage