Mortgage lenders usually require homeowners to have a set amount of home insurance in place in order to protect their investment. If you bought your home with cash, a home insurance policy isn't mandatory. Still, it is the best, most affordable way to cover yourself in the event of a disaster.
Key Takeaways
- Homeowners insurance is not required by state or federal law.
- Mortgage companies require you to name them as the loss payee on your home insurance policy.
- If you can't afford home insurance, you can look into your state's FAIR (Fair Access to Insurance Requirements) plan.
In this article
Is home insurance required by law?
Homeowners insurance is not required by state or federal law, but it's very rare for lenders to not include it as part of mortgages they underwrite. A home is a large financial investment for both you and a mortgage provider, and they want to make sure they can recoup their investment in the event of a loss.
Even if you don't have a mortgage, we recommend purchasing home insurance. Home insurance is an affordable way to avoid gigantic costs in the event of a disaster.
Home insurance requirements by lenders
Mortgage lenders can have different requirements for your home insurance policy. One condition that is fairly common is that you will be required to name your mortgage provider as the loss payee on your home insurance policy. Lenders do this in order to stay in the loop and make sure that claim payouts go toward the required house repairs or rebuilding.
The amount of home insurance coverage that's required may vary from provider to provider, but dwelling coverage is usually the key requirement. We recommend having enough dwelling coverage to rebuild your house from the ground up. Lenders can also require you to have flood or earthquake insurance if you live in a high-risk area.
Mortgage lenders can also specify if your payout needs to be based on your home's replacement cost. Replacement cost payout reimburses you on a claim in an amount equal to what is needed for full replacement of damaged or destroyed parts of your house. Payouts can also be based on actual cash value (ACV). ACV pays out at the current value of the repaired or replaced item, minus any depreciation.
Do I have to pay home insurance through escrow?
Mortgage lenders can also require you to set up an escrow account to cover the costs of your home insurance. This is to make sure your home insurance premiums and taxes are paid. Mortgage companies may waive an escrow requirement if you make a down payment of 20% or more.
What if I can't afford home insurance?
If for some reason the home insurance quotes you receive are too far out of your budget to buy, look into your state's FAIR (Fair Access to Insurance Requirements) plan. FAIR plans are state-approved insurance programs geared towards providing home insurance to homeowners who cannot get affordable home insurance elsewhere. While the cost is often high in comparison to the low amounts of coverage given, FAIR plans are usually able to at least cover lender requirements for home insurance.
If your policy is canceled due to failure to pay your premium, your provider will usually give you a grace period before the cancellation goes into effect. This should give you time to find new coverage in order to satisfy your lender's requirements. Your mortgage company will require you to find a new home policy.
What kinds of coverage do I need?
A home insurance policy is made of different coverage types, including dwelling, personal property and liability coverages. Homeowners should have enough insurance coverage to rebuild their home if it's destroyed.
| Coverage | What it covers |
|---|---|
| Dwelling | The structure of your home |
| Other structures | Other structures on your property such as a fence or a garage |
| Personal property | Your belongings |
| Loss of use | Temporary living expenses if your home is unlivable after a loss |
| Personal liability | Legal, medical and settlement costs if you are sued and found liable |
| Medical payments to others | Medical expenses if a guest is injured on your property |
To determine how much dwelling coverage you need, you will need to calculate your home's replacement cost. Your home insurance provider can estimate the cost for you, but you should verify their number. To figure out how much personal property coverage you need, we recommend creating an inventory list that includes details about the value of each item you own.
Frequently asked questions
On rare occasions, and as a very last resort, your lender may purchase home insurance for you if you don't find home insurance in an adequate amount of time. It is highly advisable that you do what you can to keep this from happening. Lender-placed home insurance can be more expensive than a standard home insurance policy.
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