Is Homeowners Insurance Required And Do I Really Need It?

Finding out you need to get home insurance coverage before you can close on your loan can be nerve wrecking.But it doesn’t have to be:There are some very fast ways to get a home insurance quote. 

And depending on your specific situation, having homeowners isn’t actually always required.

In this post today I will help answer the question is homeowners insurance required and help you understand when you must have it and situations where it probably isn’t required.

Is Homeowners Insurance Required By Law?

While you might be legally required to purchase car insurance, the same can’t be said about homeowners insurance.  Home insurance isn’t legally required at any level of law from local to federal.

However, mortgage lenders can legally require you to buy a homeowners insurance policy before they will fund the mortgage. The lender can even foreclose on your home if you don’t keep your policy active and in good standing.

Earthquake and Flood insurance isn’t required either, but if you live in a place that often has floods the rules change a bit for Flood insurance. If you obtain a mortgage from a federally regulated lender then it is legally required for you to have flood insurance if you live in a place that is prone to flooding.

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Why Is Homeowners Insurance Required By Lenders?

The answer to this is of course a very selfish one, but in the end it helps everyone.  The lender is giving you a ton of money, let’s be honest, almost none of us know anyone that would let us borrow the amount of money needed to purchase a home.

They want to make sure you are in a financial position to keep paying your mortgage and to stay in your home if a disaster struck. Just imagine if a tornado destroyed your home and you didn’t have any insurance. Would you honestly keep paying the mortgage on a home that you can’t even re-build?

How would you feel to lose your home and have no way to recoup from it? The mortgage company isn’t really thinking about you when they require you to get coverage, but as I said, in the end, the fact they require it really helps you in the long run.

Why You Need Homeowners Insurance?

Of course, getting home insurance because your mortgage lender requires it isn’t the only reason why you should consider securing a homeowners insurance policy.

There are numerous benefits that come with having homeowners insurance. Consider the following benefits.

It Protects Your House

A home is where we lead our lives, store our personal property, and create cherished memories. Beyond that, it’s also a major investment, and we don’t want to find ourselves in a situation where our property is destroyed and we’re unable to remedy the situation. Home insurance protects your house against a range of disasters that could strike at any moment. Whether it’s flood or water damage, fires, or other natural disasters, having protection allows you to maintain the peace of mind you need in the event of a costly disaster. Rather than asking yourself, “Why should I get homeowners insurance?”, ask yourself, “Could I afford to live without a homeowners policy if something were to happen to my home?”. 

It Protects Your Belongings

The loss of items that we hold dear to us can be devastating, whether it be through a natural disaster or theft. However, what can be even more difficult to cope with is the financial responsibility of covering replacement costs out of pocket. Home insurance not only covers your home but the items within it as well. This way, if you’re dealing with the destruction of your property alongside the loss of your items, your insurer covers the home itself and the replacement costs of the items within it. 

It Protects You Against Lawsuits

When most people think of homeowners insurance coverage, they likely think about the above points. But home insurance actually offers you another type of coverage that you may not have considered: liability coverage. Should someone be harmed on your property and decide to take legal action, you can be held accountable and may have to pay for said damages. Much like you wouldn’t want to have to pay out of pocket for damages to your home or belongings, personal liability settlements can be costly. Homeowners insurance gives you the liability coverage you need in events like these so you don’t end up having to pay for these damages and medical payments on your own. Liability insurance is a must for homeowners and business owners alike!

You Determine What Type of Coverage You Have and How Much You Pay

If you plan on purchasing a home with or without a mortgage, you’re going to need to get home insurance either way. However, making the decision to purchase your own insurance gives you full control over your homeowners insurance policy and how much you’re paying for it. 

According to Digital Honey, the best way to maintain control over your finances is to find a policy that works best for you rather than giving your lender the ability to dictate which insurance policy you have. 

If you decide to let your lender choose your insurer, you’re at their mercy when it comes to the cost of insurance premiums and which insurance company they decide to use. It’s much better to find the best homeowners insurance on your own and maintain control over your policy. 

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What Happens If You Don’t Have Homeowners Insurance?

If you own your home and don’t have a homeowners policy, you run the risk of having to fully cover any damage to your home, to the personal property within, or to anyone who may be injured on your property. 

If you don’t have home insurance and are looking to secure a mortgage for a home, a lender will typically choose a mortgage insurance policy out for you and force you to pay for said insurance (whether you’re making payments through an escrow account or independently). 

Put simply, not having homeowners is a lose-lose situation for all homeowners. Having insurance is crucial to protecting your assets. 

What Will Your Lender Require To Be In Your Policy?

Your lender may give specific guidelines to you and your agent as to what parts of coverage you will need in your policy. Things like certain hazards that need to be covered and naming them as a loss payee on your policy.

They Might Require Replacement Cost Coverage

Your lender might require that you have a policy that has a replacement cost structure (RCV) instead of an actual cash value policy (ACV). Replacement cost policies cover the entire cost to replace your home where the actual cash value policy will only cover the current value of the home.A couple occasions where lenders may instruct you to acquire a RCV policy rather than ACV policy are:Your Home Is Super OldIf your home is really old and hasn’t had any modern cosmetic or structural improvements since it was constructed, an ACV policy would only pay to replace damage after 80 or so years of depreciation is accounted for. That would leave you with a very small claim check and you’d have to cover the rest out of pocket. Mortgage companies may view the risk of loaning you money too high.Your Home’s In A Disaster AreaIf your home is in an area susceptible to natural disasters like hurricanes, earthquakes, mudslides and floods, your lender may suggest your payout be based on the extended replacement cost (ERC) of the materials or labor.Extended replacement cost policies cover you if materials and labor increase over time to cover the difference.

Lenders Can Require Flood Insurance

If your house is located in the FEMA designated flooding areas “A” or “B”, all lenders will require federal flood insurance.Lenders could even require flood insurance if the home is in floodplain “C”, which have less flood propensity but are still at-risk areas.

Lenders Might Have Other Policy Requirements

Lenders may require that you supplement your hazard insurance (dwelling, other structures, personal property, and loss-of-use coverage) with riders or additional coverage types that protect against certain perils.Depending on where you live, your lender may instruct you to add earthquake or hurricane insurance.

Lenders Are Required To Be Your Loss Payee

Your homeowners insurance company will require that your lender is named as a loss payee along with yourself. That means that if you suffer a loss and file a claim, the claim check is made out to you and your mortgage lender. You’ll still be covered, but your lender must sign off on the check to ensure that the expenses are going toward covering the loss and not your new car.

How Much Homeowners Insurance Do I Need?

It can be difficult to determine just how much homeowners’ insurance you need to cover all of the potential damages that your home may experience. The good news? Most lenders will actually tell you what the minimum requirements are, which provides you with a solid starting point to shop for plans that will suffice until you pay off your home in full. However, there are additional considerations that you should be making when you begin shopping for home insurance. Some considerations to make include:

What Would It Cost to Rebuild My Home? 

Although lenders may suggest a minimum amount, this minimum coverage may not actually cover the full cost of repairs if your property is damaged. 

A good rule of thumb to follow is to use a home insurance calculator to calculate the cost of repairs needed to rebuild your property and find an insurance policy that covers the amount. 

This way, if you do face a disaster, you can rest assured that your insurance company will help you get your home back. 

What Would It Cost to Replace My Belongings? 

You never know which belongings will be impacted by a disaster. As such, it’s best to look for an insurance company with homeowners insurance policies that will cover the replacement costs of all of your personal property should items be missing or damaged. 

You should also do further reading to see if your insurance provider offers an actual cash value or replacement cost coverage. (Actual cash value property insurance can lower your premiums, but actual cash value will account for depreciation rather than paying the full replacement value of your belongings). 

Just like renters insurance or condo insurance (as well as additional plans like auto insurance), homeowner insurance is necessary for this reason!

What Risks Could Put Others in Danger? 

Whether there are some dangerous features of your home or unruly houseguests that cause destruction, find an insurance policy that will provide you with maximum liability coverage in the event that someone experiences a bodily injury on your property.

What Happens If My Policy Gets Cancelled?

There are several reasons your home insurance company could cancel your policy. Maybe you forgot to mention that you have a blacklisted dog or stopped paying the monthly premiums. You could have filed too many claims and are now seen as too high of a risk.

Whatever the case, mortgage companies will require that you have and keep insurance.Below are steps you will need to take if this happens:

You Have To Buy A New Policy (You Will Have Time)

The insurance company is required to give you and your lender a 30 day notice before your policy is cancelled and the cancellation takes affect. You should check your CLUE report to make sure your claims history isn’t too busy or most insurance companies may still decline you for coverage.

Look Into State Sanctioned Plans

Being in the position of being un-insurable is never a good feeling and if that happens to you, you still have options. That’s where Fair Access to Insurance Requirements or FAIR plans come into play.While these policies are much more expensive, they might be your only option for a while because they are made for people who are considered high-risk.

Your Last Resort – The Lender

Yes, your lender might buy the insurance for you however you will see an increase in your monthly mortgage payment and it is usually up to 3 times more expensive than traditional homeowners insurance.

What States Require Homeowners Insurance? 

There are no laws in any state that require homeowners to have homeowners insurance. However, this situation becomes more complex when mortgages are involved. Before you seek out a mortgage, do your due diligence and speak with a licensed insurance agent.

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Taking Action

Hopefully I have clearly answered the question is homeowners insurance required. While it isn’t legally required you would honestly be crazy to go without it, especially with all of the wacky weather patterns and people in this world. If you don’t have coverage you need to click here or that button above as fast as possible and get the process started.