Is Homeowners Insurance Required?
Home insurance isn’t a legal requirement. But most mortgage lenders will require you to purchase a policy as a condition of your loan.
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Buying a home can be an exciting time, and it comes with a lot of paperwork, including purchasing an insurance policy.
Though no state laws require homeowners to buy home insurance, your lender will probably require you to carry coverage as a condition of your mortgage loan.[?] Mortgage companies have a vested interest in your property, and an insurance policy helps them protect their investment as well as yours if something were to damage or destroy your home.
Here’s what you should know about homeowners insurance requirements.
Why lenders require homeowners insurance
Mortgage lenders require homeowners insurance because they want to protect their investment. They require homeowners to secure property insurance before closing and carry it until they pay off their mortgage. A homeowners policy ensures that the owner can afford repairs if a fire, explosion, or other covered peril damages the home.
You have to secure homeowners insurance and show proof to the mortgage company before you sign the closing documents. Fortunately, you’ll only need to show them your declarations page showing the correct address and insurance policy start date.
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The role of state governments in home insurance
No state or federal laws mandate that homeowners need to purchase homeowners insurance. But each state has regulations about which coverages the companies can include in a homeowners policy and how they must cover the property.
State insurance departments or agencies help regulate insurance companies by looking into customer complaints and reviewing company practices, solvency, and rating methods.[?]
Good to Know
Home insurance coverage from state to state is usually the same. But prices can vary based on where you live. It can cost more to secure coverage in states with higher risks of certain weather perils.
How much homeowners insurance do lenders require?
Lenders typically require you to carry at least enough insurance to cover your home’s full replacement cost if you had to rebuild from the ground up. The 80/20 rule is an industry standard that stipulates you should insure your home for at least 80% of its replacement cost. If you insure your home for less than this amount, your insurance company might not fully cover your claim.
To estimate your home’s replacement cost, multiply your home’s square footage by local per-square-foot construction costs. You can call your local real estate agent or insurance agent to find out construction costs in your area.
Properties with more detached structures and high-end finishes cost more to rebuild per square foot, while the opposite is true of homes with fewer detached structures and more basic finishes.
What happens if you don’t buy home insurance?
A lender won’t approve your mortgage without proof of homeowners insurance. You’ll also be liable for all repairs to your home if something happens, which can result in hundreds of thousands of dollars depending on the type of damage.
As part of the homeowners policy, you’ll have to add the mortgage company to the policy as an interested party. If you or the insurer cancels the policy after closing, your insurance agent will send a letter to the mortgage company letting them know. The lender will then send you a note informing you it’ll cover the insurance for an expensive daily rate until you find new coverage.
Most expensive states for homeowners insurance
Some states have extremely high home insurance rates due to their risk of natural disasters, such as flooding, hurricanes, and tornadoes. Homeowners in these states might be hesitant to purchase a policy if it’s too expensive, or they might have trouble finding coverage since some insurance companies won’t write policies in high-risk places.
These are three of the most expensive states for homeowners insurance:
The table below shows average premiums in 10 of the most expensive states for home insurance.
The below rates are estimated rates current as of: Monday, October 6 at 5:00 PM PDT.
State  | Average Annual Premium |
|---|---|
| South Carolina | $2,436 |
| Colorado | $2,748 |
| Alabama | $2,988 |
| Mississippi | $3,012 |
| Nebraska | $3,204 |
| Kansas | $3,336 |
| Texas | $4,140 |
| Oklahoma | $4,560 |
| Louisiana | $5,136 |
| Florida | $5,640 |
How to find cheap homeowners insurance
The best way to find cheap homeowners insurance is to shop around and compare quotes. You can also try to decrease your monthly payments by following these tips:
Raise your deductible. If you increase your deductible, you’ll typically pay lower home insurance premiums.
Install safety equipment. By installing safety features like a doorbell camera or a security system, you can potentially earn a homeowners insurance discount.
Bundle your home and auto policies. Most insurers provide a discount for policyholders who bundle two or more coverages, like home and auto insurance.
Add all the discounts you can. You should always ask your insurance agent which discounts you qualify for.
Maintain good credit. Having good credit makes you a lower-risk policyholder for companies to insure.
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What homeowners insurance covers
All insurance companies offer the standard HO-3 policy, which protects against the following perils:
Windstorms
Hail
Vandalism
Fire
Lightning
Falling objects
Theft
Tornadoes
Smoke
Other natural disasters
Here are the different parts of an HO-3 policy:[?]
Homeowners insurance FAQs
If you’re still wondering about home insurance requirements, the additional information below can help as you research different policies and coverage amounts.
Mortgage insurance vs. homeowners insurance: What’s the difference?
Homeowners insurance protects your home, other structures on the property, your personal property, and your personal liability. Lenders require you to keep this coverage until you repay your mortgage loan.
Mortgage insurance protects the lender if you lose your home due to foreclosure. Lenders require homeowners who pay less than 20% down to carry the coverage until they’ve paid 20% of their mortgage.
Can you get homeowners insurance without an inspection?
Yes. Legally, you can get homeowners insurance without a home inspection. But insurance companies typically want an inspection before writing the policy to ensure they aren’t buying themselves a claim. Some companies can even deny coverage based on the condition of the home.
Is it illegal not to have home insurance?
No. It’s not illegal to forgo a home insurance policy. But if you’re getting a mortgage on your home, most lenders won’t give you a loan unless you keep an insurance policy in place.
Do you need homeowners insurance if your house is paid off?
You’re not required to keep homeowners insurance once you’ve paid off your mortgage, but it’s a good idea to maintain coverage. Without coverage, you’d have to pay out of pocket to fix any damage to your home if you don’t have homeowners insurance, which could get quite costly.
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