Homeowners insurance is not required by law in any state, but mortgage companies usually insist you get a policy.
One of the most common and persistent myths about home insurance is the belief that you're legally mandated to carry coverage. Home insurance isn’t a requirement anywhere in the US.
But even when you know that, you may have other questions, such as:
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Are there any other reasons home insurance might be required?
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Why do most homeowners get coverage?
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What happens if I don’t get home insurance?
We answer these questions and more below.
When is homeowners insurance required?
If you have a mortgage on your home, your mortgage lender most likely required you to get homeowners insurance before it finalized your loan. Your bank probably asked for proof that you have a policy, too.
Why? Because your lender is part owner of your home, which means it has an insurable interest. If your home is damaged by something like a fire or a storm, home insurance helps you pay for making repairs or rebuilding.
Imagine what could happen if your home were destroyed and you couldn’t afford to rebuild it. Would you continue to make your mortgage payments? Maybe, but then again maybe not. If your house is uninhabitable or unsellable, then the mortgage has little to no value. This means foreclosure isn’t a great option for the mortgage company to recoup its losses, either.
Long story short, your home insurance protects your mortgage holder from financial losses after a disaster as much as it protects you.
Your bank may also require you to purchase flood insurance or earthquake coverage in certain locales. This typically happens if your home is in a designated flood plain or an area where earthquakes are common.
Another reason you may have to get home insurance? Your homeowners association (HOA). Some HOAs make homeowners insurance mandatory in their rules. If you don’t comply, then the HOA might:
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Fine you.
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Take you to court.
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Place a lien on your home.
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This may be true even if you own your home outright and don’t have a mortgage.
What happens if you have a mortgage and no homeowners insurance?
As we mentioned above, almost all mortgages come with provisions from the lender that the buyer must maintain insurance on the property. So what happens when you have a mortgage and no homeowners insurance?
If you allow homeowners insurance to lapse and don't replace it on your own, your mortgage company will likely get force-place insurance for your home. Force-placed insurance is homeowners insurance placed on a financed property by the mortgage lender. It’s usually the result of a mortgage holder not maintaining proper insurance coverage on a house.
You’re responsible for making payments on this force-placed insurance or for resecuring coverage. And while force-placed insurance does protect your dwelling from hazards like fire, windstorms, and vandalism, it usually doesn’t cover your personal belongings, furnishings, appliances, or personal liability. Moreover, it’s historically much more expensive than homeowners insurance you purchase yourself.
How much homeowners insurance does a lender require?
Typically, your lender wants you to insure your home up to the amount it would cost to rebuild it at today’s prices (i.e., its replacement cost ). This can differ from the current market value or assessed value of the home.
Some lenders may also dictate the type of policy you purchase. Additionally, your policy language lists your lender as a “loss payee” on your policy. This helps protect the bank’s stake in your property if you have a loss.
Do you have to have homeowners insurance?
While there’s no law that says you have to get home insurance, coverage is always a good idea. A policy protects you from the financial consequences of most property losses you might experience, including damage caused by a catastrophic storm or a simple hailstorm. It may also help cover your personal property inside of your home. A small kitchen fire won’t seem so small when you have to replace flooring, cabinets, countertops, and even pots and pans.
Homeowners insurance can also come with liability coverage, which is essential to protecting your financial stability. It covers you when someone claims you, your dog, your fence, your walkway or anything in or on your home has caused an injury or property damage.
Ultimately, homeowner insurance protects your most valuable asset, your home. Without a quality homeowners policy, you put your home, your belongings, and your financial future at risk.
The importance of maintaining your homeowners insurance
The increasing costs of homeowners insurance may make some homeowners question the need for homeowners insurance. If you have a mortgage on your home, giving up your home insurance is not likely to be an option. Allowing homeowners' insurance to lapse or expire may lead to more expensive force-placed insurance. We encourage you to explore other options to make sure you have the coverage you need.
