Is homeowners insurance required?

Is homeowners insurance required by law?

No, homeowners insurance is not required by any law, either at the state or federal level. It is, however, required by mortgage agreements to protect the lender's investment for as long as you owe money on the loan.

“Mortgage lenders will require you to have insurance until the loan is paid off," Marlen Brito, Personal Lines Account Manager at World Insurance Associates LLC in Worcester, Massachusetts, said. Lenders want to protect their investment until the title is handed over to you in case of a major disaster like a fire or storm. Homeowners insurance guarantees that the loan will be paid off if the home is a total loss, or repaired so that it doesn't lose its value.

When are you required to have home insurance?

You are required to have home insurance when you have a mortgage. It’s part of your loan agreement, and if you fail to keep a policy in force, the lender can buy a policy and charge you for it.

"In most cases, lenders can legally force place insurance on properties that go uninsured," Brito said. The lender can bill you for this insurance, and it’s often very expensive.

This is the lender's way of protecting the asset they have given you a loan for. It’s a similar situation with a car that you finance – the lender requires the maximum amount of insurance until you pay off your vehicle, which is essentially collateral for the loan. It’s the only way to ensure that the collateral is protected. The major difference is that car insurance is also required by law in most states due to the liability risk.

How much homeowners insurance is required for a mortgage?

You need enough dwelling coverage on your policy to meet the mortgage company’s insurance requirements. This pays to rebuild your home in case of a fire or other disaster that damages it. Think of it this way: if you have a mortgage, you don't technically own your home yet; the lender does. It needs assurance that the property is fully protected until it's paid off and the title is signed over to you. Home insurance provides that assurance.

If you live in certain disaster-prone areas, your mortgage lender may require additional coverage such as flood or earthquake insurance, which are not part of regular homeowners policies.

Your lender will also want to make sure your coverage includes certain things like:

Fire and lightning
Damage from wind and hail
Theft and vandalism
Falling objects
Damage from the weight of snow, ice, or sleet
Frozen pipes
Vehicles
Riots or civil unrest
Smoke damage
Explosions

In some cases, your lender might require enough insurance to cover what you owe on the house, but be careful with this option. The amount of your loan is not the same as the cost to rebuild your home, and this option may leave you paying for more insurance than you need or, worse, dangerously underinsured.

It’s best to get an accurate replacement cost calculation and insure your home for that amount.

Who needs homeowners insurance?

Every homeowner needs home insurance, even if it’s not a legal mandate. Few people could afford to replace their home, which makes going uninsured a big financial risk. “I don’t recommend going without insurance due to the large financial risk. For most people, their home is their largest asset and one that would be difficult to recover from should there be a loss,” Brito said.

Home insurance also provides personal liability coverage that protects you if you're responsible for injuries or damage to someone else, which can leave you owing thousands of dollars in settlements and legal bills if you don't have insurance.

FAQ: Home insurance requirements

Is it illegal to not have home insurance?

No, it's not illegal to not have home insurance, but your mortgage lender will require it. Also, not having it is a huge financial risk.

Do I need homeowners insurance if my house is paid for?

No, you don’t have to carry home insurance if you own your home outright. However, everyone should have homeowners insurance to protect their biggest asset. It is recommended by insurance, finance and real estate professionals.