Is Homeowners Insurance Required?

Is Homeowners Insurance Required?

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Homeowners insurance is not required by law, but most banks and other mortgage lenders require their customers to have a homeowners policy to safeguard the value of the loan. If you have already paid off your mortgage, you don't have to buy homeowners insurance. That being said, it's an effective way to protect one of your most valuable assets.

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.

Why do mortgage lenders require homeowners insurance?

Mortgage lenders require homeowners insurance in order to protect the value of their investment.

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.

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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, for example, you stopped paying for your policy after you received your loan from a bank. Once you miss a payment, you'll typically receive a notice by mail or phone that your insurer has not received your payment. After 30 days or multiple missed payments (it varies by insurer), your coverage will lapse.

If your insurance lapses, you have defaulted on your mortgage by failing to meet its requirements, and your lender will assign you to a force-placed insurance policy. Force-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 force-placed policy can often be hard, too, and if you are unable to pay for your lender-placed policy, you could face foreclosure.

If you are worried about missing a homeowners insurance payment, the best thing to do is contact your insurer. Sometimes, insurers will allow payment deferrals due to unforeseen circumstances, such as losing your job.

If you have trouble remembering to pay your bill on time, most insurers allow you to set up autopay. Additionally, a lot of lenders offer the option to pay for homeowners insurance directly through an escrow account.

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 were to become uninhabitable. If you had to stay in a hotel while your home was being rebuilt and you didn't have insurance, you would have to deal with a high hotel bill — especially if you lived in a big city like New York or San Francisco.

If you didn't have insurance, your belongings wouldn'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 could 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 were to suffer damage, you would be responsible for covering any costs from the flood damage yourself.

Do I need homeowners insurance for a rental property?

There is no law that requires homeowners insurance for a rental property. However, if you are the landlord and you take out a mortgage for the rental property, your lender will require you to be insured. Depending on the seasonality and length of time for which you rent out your property, you might be required to have landlord insurance.

Do you need homeowners insurance before closing?

Yes, you need to have homeowners insurance before closing on a property if you are taking out a mortgage. Lenders require all buyers to have proof of insurance at closing in order to prove their investment is insured.

Can you have a mortgage without homeowners insurance?

All lenders require homeowners insurance in order to take out a mortgage. If you don't get a homeowners insurance policy or you let your policy lapse, your lender will set up force-placed insurance instead. These policies are much more expensive and don't offer you as much coverage, so it pays to make sure you keep your home insured 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.