Is Homeowners Insurance Required?

Is Homeowners Insurance Required?

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You are not legally required to have homeowners insurance, but your mortgage probably requires it. Banks and other lenders often require their customers to have a homeowners policy to safeguard the value of the loan in case something bad happens to your home. Mortgage lenders won't allow you to receive a loan until you meet their insurance requirements.

You could decide not to get homeowners insurance if you've already paid off your home loan. Although you don't have to have insurance if you've paid off your mortgage, it's an effective way to protect yourself from a variety of perils that could lead to large costs.

Do you have to have homeowners insurance?

Since the government doesn't require you to have homeowners insurance, you could go without a policy if you've paid off your mortgage — but we recommend you purchase a policy anyway. If you have a mortgage, your lender requires you to buy and keep a policy even though you're not legally obligated to purchase homeowners insurance.

Imagine that you weren't required by a bank to be insured and a fire sweeps through your area, destroying your home. If you were unable to pay to rebuild the house, the bank's loan would have no value, and your lender's investment would be completely lost.

For this reason, lenders can also require you to get flood insurance if you live in an area that experiences a high frequency of flooding, such as a coastal region susceptible to hurricanes or heavy rainfall. Similarly, your bank can also require you to get additional riders to protect against policies that aren't typically covered by your regular homeowners insurance policy. For example, you may have to buy coverage for backed up water or even earthquakes depending on where you live and which company provides you with your loan.

What happens if you go without homeowners insurance?

You can't go without homeowners insurance if you're required to have a policy by your lender. Say you stopped paying for your policy after you received your loan from a bank. After you miss multiple payments, your coverage will lapse.

If your policy lapses by even one day, your lender will consider you uninsured. You will have defaulted on your mortgage by failing to meet its requirements. If this happens, your lender will assign you to an insurer and policy of their choosing, and you will be required to pay for it. If you are unable to pay for a lender-placed policy, you could face foreclosure.

Lender-placed policies are typically much more expensive and might provide poorer coverage than your old policy. A lender-placed policy might not include sufficient protection to your personal property because the bank only has stake in the structure of your house. Getting a new insurance policy after you’ve had a lender-placed policy can often be hard, too.

Why do you need homeowners insurance?

If you decide to skip on homeowners insurance, you would be responsible for paying out-of-pocket to repair any damage to your home. This means that if you didn't have insurance, you'd be exposed to everything from broken windows to tornadoes and fires that could affect your entire house.

Imagine a fire destroys your house. Without the dwelling coverage that comes with your home insurance policy, you would have to pay for the entire cost of rebuilding on your own. After a destructive fire, replacing your physical house without insurance is only your first problem.

Having a homeowners policy in this situation would also provide you with additional living expenses if your dwelling becomes uninhabitable. If you need to stay in a hotel while your home is rebuilt and you don't have insurance, you would have to deal with a high hotel bill — especially if you're in a big city like New York or San Francisco.

If you didn't have insurance, your belongings won't be covered by the personal property protection that comes with a homeowners policy. If the fire that destroyed your home also burned your things, you could be facing another large cost before you can regain your old standard of living.

Besides covering damage to your property, a homeowners policy grants you liability coverage if someone sues you for personal injury or damage to their property. Imagine your dog bites a passing jogger, sending them to the hospital for their injuries. If they sued you for damages, you would have to pay for litigation fees — even if you won the case. Losing the case could cost you even more money in medical expenses for the injured person.

Do you need homeowners insurance for extended perils?

If you don't have a mortgage, you don't need homeowners insurance for extended perils. However, even if you do have a home insurance policy, you might not be covered from a few potentially dangerous perils. For example, if you live in a low-lying area and you don't have flood insurance, you could be just as unprotected as someone who is uninsured. If your property suffered damage, you would be responsible for covering any costs from the flood damage yourself.

Andrew Hurst

Andrew Hurst is a Data Writer at ValuePenguin who reports on insurance. His analysis has been featured in Forbes, MSN, USA News and Fox News, among others. He's also appeared in interviews broadcast by ABC and the CW. He previously taught composition and research at Wright State University.

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.