No one buys a home expecting burglary, fires, or flooding. The damage caused by these unexpected events is often an overwhelming expense that could easily drain a homeowners' reserves. That’s why mortgage lenders typically require home insurance before closing on a new home. Long story short, homeowners insurance is required in most situations. Here’s what you need to know:
What is homeowners insurance?
When you purchased your home, your lender likely requested that you provide proof of homeowners insurance ahead of the closing. Typically, the payment for that insurance is included in the escrow (a separate account that pays your property taxes and insurance) of your monthly mortgage payment alongside your property taxes and mortgage insurance.
This type of insurance policy protects your home against interior and exterior damage as well as the belongings inside your home. After a covered event, such as falling objects, fire, lightning, or civil unrest, your insurance provider cuts you a check for the damage so you can have it repaired. In some cases where the property is fully destroyed, the insurer may even pay to rebuild the home and replace damaged belongings.
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Why do lenders require home insurance?
When a bank lends you money to buy a home, they’re making an investment in the property you’ve chosen. If all goes well, you’ll repay the full amount of the mortgage loan plus interest, which equals a profit for them. However, if you default on the mortgage, your home becomes collateral for the bank to recover the money it lent you.
Your mortgage lender has a vested interest in ensuring your property remains valuable even after unanticipated situations. If the home is significantly damaged or decimated, it impacts your lender’s return on their investment. They require homeowners insurance to reduce the risk of losing money while also protecting you from the same unforeseen occurrences.
What is mortgage insurance vs home insurance?
Both home insurance and mortgage insurance are part of your monthly mortgage payment. While they sound similar, they don't provide the same coverage. If you’ve made less than a 20% down payment on a conventional mortgage, your lender likely requires private mortgage insurance or PMI. This only protects your lender if you stop making mortgage payments; it doesn't protect you. Home insurance protects both you and your lender.
Use our tool, in partnership with Bankrate, to compare rates from different home insurance lenders.
What does home insurance cover?
Homeowners insurance (aka hazard insurance) consists of multiple coverage types that could help in various circ*mstances. There are four areas that most home insurance policies cover as a general standard:
- Dwellings (physical home structure)
- Personal belongings
- Liability
- Additional living expenses
1. Dwellings
Dwelling coverage applies to damage that happens to the internal and external structure of your home. It compensates you for repairs or rebuilding in the event of:
- Hurricanes
- Hail, Ice, Snow, Sleet
- Fire/smoke
- Lightening
- Theft/vandalism
- Falling objects
- Explosions
Dwellings could also cover qualifying detached structures on your property, but that depends on your policy. More disasters or events could also be covered within your specific insurance policy, so you’ll want to read through your insurance documents carefully.
2. Personal belongings
Your furniture, equipment, clothing, and electronics are items that a home insurance policy would reimburse you for if they were damaged or destroyed in a disaster. Generally, insurance covers 50% to 70% of the value of these belongings. Valuable possessions like jewelry, art, and collectibles could need additional coverage.
3. Liability coverage
If someone were injured on your property, you would be personally liable for legal costs, medical bills, and other expenses without the protection of home insurance. This covers the cost of legal protection and even damage created by your pets.
4. Additional living expenses
If the effects of a catastrophe render your home unlivable, this form of coverage takes care of costs such as:
- Hotel bills
- Meals
- Storage space
The limits on this coverage vary depending on policy but it’s typically 20% of your dwellings coverage.
Related Content
- The Basics of Buying Homeowners Insurance
- Delaying Repairs Jeopardizes Home Insurance Policies
- Cheapest Home Insurance: How to Find the Best Policy
FAQs
In case of a claim, you need enough coverage to rebuild your home, replace your belongings, and protect your wallet — if you're liable for someone else's injuries or damages. Additionally, you need enough coverage for living expenses if you can't occupy your home while it's being repaired due to a covered loss.
Is homeowners insurance really necessary? ›
Legally, it isn't, but most mortgage lenders require you to have it. Generally, it is seen as prudent to protect your investment.
Is it smart not to have homeowners insurance? ›
Possibly Losing Your Home
If your mortgage lender requires it and discovers your home isn't insured, it could initiate foreclosure, resulting in the loss of your home. Or the lender might simply force you to get homeowners insurance by getting new coverage for you and adding it to your monthly mortgage payments.
What is the 80/20 rule in homeowners insurance? ›
To meet the 80% rule, if your home has a total replacement cost value of $400,000, you'd need to purchase $320,000 in coverage (80% of 400,000). If you fail to meet this rule, you won't be covered for the entirety of damages and instead will have to pay out-of-pocket to cover a portion of the expenses.
What does Dave Ramsey say about homeowners insurance? ›
The purpose of homeowners insurance is primarily to ensure that you can afford to replace your home if it's damaged or destroyed. In order to make sure you can replace your home in its entirety, Dave Ramsey recommends guaranteed replacement cost coverage.
What is the danger of not having homeowners insurance? ›
Without homeowners insurance, a property owner would have to pay out of their own pocket for any disaster. They might have to replace the home with no help after devastating events, like a fire.
What are the cons of homeowners insurance? ›
Cons of Home Insurance:
- Cost: One of the primary drawbacks is the cost of home insurance. ...
- Deductibles: Home insurance policies often come with deductibles, which means you need to pay a certain amount out of pocket before the insurance coverage kicks in.
Home insurance protects your house
So if a huge unexpected disaster takes place, like a fire or windstorm, you'll save hundreds of thousands (or millions depending on your house size) on out-of-pocket expenses.
How many Americans don't have homeowners insurance? ›
One in 13 American homeowners are uninsured – approximately 7.4% – living in about 6.1 million homes. Homeowners earning less than $50,000 per year are twice as likely to lack insurance compared with homeowners in general. Among lower-income homeowners, 15% are without coverage.
What percentage of people don't have home insurance? ›
That's one in 13, or 7.4%—and that percentage is even higher for Black, Hispanic and Native American homeowners, those who earn less than $50,000 a year, people who inherited their houses and owners of manufactured homes.
Homeowners insurance covers your home, personal belongings, and liability claims. You can get quotes online or by working directly with a home insurance agent. Plan on getting at least three quotes to make sure you find the best policy for your budget.
What is the rule of thumb for dwelling insurance? ›
This is known as the 80/20 rule. If you're underinsured, you'll get less money if you file a claim. Let's say your home is insured for $200,000 but would cost $300,000 to rebuild. If you file a claim for $100,000, the insurance company could prorate your settlement by the percentage that you're underinsured.
What is the rule of thumb for estimating homeowners insurance? ›
For a quick estimate of the amount of insurance you need, multiply the total square footage of your home by local, per-square-foot building costs. (Note that the land is not factored into rebuilding estimates.)
Is it good to change home insurance every year? ›
How often should I change homeowners insurance companies? It's recommended to review and reassess your homeowners insurance policy every one to two years, especially if there's been an increase in your premium or any changes in your policy or personal circ*mstances that could affect your rates.
What happens if you have a mortgage and no homeowners insurance? ›
If you have a mortgage or other home loan, keeping an insurance policy in place is likely a requirement of your loan agreement. Your lender will be notified of policy renewals and cancellations. If you fail to purchase coverage or let it lapse, your company may send your mortgage into default.
What is the best homeowners insurance? ›
The best home insurance companies in April 2024
| Insurance Company | Best for | Bankrate Score |
|---|
| USAA | Best overall | 4.7 Rating: 4.7 stars out of 5 |
| Allstate | Best overall | 4.2 Rating: 4.2 stars out of 5 |
| Lemonade | Best for digital experience | 3.8 Rating: 3.8 stars out of 5 |
| Chubb | Best for high-value home coverage | 4.3 Rating: 4.3 stars out of 5 |
6 more rowsKey Takeaways. Failing to maintain homeowners insurance can breach your mortgage terms, resulting in penalties, mortgage recall and potential financial challenges. Without coverage, lenders may impose lender- or force-placed insurance, which is a costly alternative to standard home insurance policies.
Why do you need homeowners insurance when you have a mortgage? ›
Homeowners insurance may be required
That's because the lender wants to be sure its financial investment in your home is protected if it's damaged or destroyed by a fire or other certain risks. In addition to home insurance, other types of insurance may be required by mortgage companies.
Does homeowners insurance pay off your mortgage if the house is lost? ›
If a covered disaster completely destroys your house, your standard homeowner's insurance policy includes a "loss of use" or "additional living expense" protection, providing temporary housing until you recover. It pays off your mortgage, freeing you of that obligation.
