When buying a home, there are many extras added to the purchase price. If you have a loan, the interest will be significant, and there may also be private mortgage insurance, property taxes, and homeowners insurance. All of these things add up and, if you’re looking to save money, you might wonder if the homeowners insurance portion is truly necessary.
The answer is yes, you need homeowners insurance, but it might not be for the reasons you think.
Is Homeowners Insurance Legally Required?
Homeowners insurance is not a legal requirement imposed by any federal or state law. You’re not going to be fined if you decide not to purchase homeowners insurance and no government agency is going to check up on you.
Is Homeowners Insurance Required by Lenders?
While it’s not legally required, where you’ll find that homeowners insurance is required is when you try to get a mortgage. It is rare to find a lender who is willing to approve you for a mortgage without making homeowners insurance a stipulation in your contract. This is because when you take out a mortgage to buy a house, you and that lender are essentially going into the venture together.
Your lender has a financial interest in your home, at least until you pay off the mortgage, which is why they want to make sure it’s protected from catastrophic damage. They also want you to be protected in the event of damage or if the home is destroyed so you can fix the home, continue living in it, and continue paying your mortgage.
Homeowners insurance can cover a lot more than just your home, and the added protections are good to have, but your mortgage lender is most concerned about the coverage that protects the home itself. They’ll often require you have insurance that either covers the full replacement cost or the unpaid principal balance on the mortgage.
In addition to minimum coverage levels, your lender may also require that your policy cover some specific events like fire, lightning, the weight of snow, frozen pipes, etc. You’ll need to prove you’ve complied with their requirements before they’ll process your loan.
Why Should I Purchase Homeowners Insurance?
Purchasing homeowners insurance to get a mortgage is a very solid reason for having this insurance. But there are even more benefits that make it desirable, even if you paid all cash for your home purchase.
It Protects Your House
The primary reason to have homeowners insurance is to protect your house. This is the dwelling coverage part of your insurance policy and it’s there for covered events such as fires, vandalism, lightning damage, and other situations that are spelled out in your policy.
This part of your coverage will come with quite a few options that will affect your premiums, deductibles, and the events that are covered. It’s a good idea to research policies to see which ones offer the coverage you want and need, either in the policy or as an add-on.
It Protects Your Belongings
Another huge benefit of homeowner’s insurance is that it protects your possessions inside the home. If there is a fire in your kitchen, your homeowners will go beyond paying for repairs to your kitchen, they’ll also pay for your appliances, dining table and chairs, and anything else that was damaged. There might even be smoke damage to other rooms and belongings and your insurance will help cover those expenses too.
One thing to note is that homeowners insurance doesn’t cover all of your belongings. If you have high-value items like jewelry, art, and/or electronics, you might need a rider policy to cover those items.
It Protects You From Lawsuits
One big benefit of homeowners insurance that most people forget about is the personal liability portion of the policy. This helps in the case that a visitor gets hurt at your house and has medical bills or decides to sue you for pain and injury.
It also is useful if you damage someone else’s home or personal property unintentionally. Perhaps you’re at a friend’s house and trip and break an expensive vase. Your insurance may cover that damage.
Your homeowners insurance may also pay for damages or injuries caused by people who live in your home and sometimes it covers damages caused by pets.
What Happens If I Don’t Purchase Homeowners Insurance?
If you don’t buy homeowners insurance, you don’t have any of these added protections, which means you’re financially on the hook if anything happens to your home, your possessions, and if there is a personal liability issue that comes up. The financial implications are often enough to prompt people to buy homeowners insurance.
If you have a mortgage, then it’s even more imperative that you get homeowners insurance and keep a policy in place. If you drop your policy and your mortgage company finds out, they sometimes have the option of buying a policy on your behalf – also known as force-placed insurance – and it’s usually more expensive with less coverage than you could find on your own.
Even worse, if you drop coverage your mortgage lender could decide you’ve broken the mortgage agreement and declare that you’re in default.
When Should I Get a Homeowners Insurance Quote?
Getting a quote on the cost of homeowners insurance typically happens as soon as you have an accepted offer. In most situations, you’ll have a few weeks or even a few months before your home purchase is finalized, which gives you time to collect quotes and select an insurance policy. Make sure this is ready to go before closing so there is no delay on the big day.
Your mortgage company will need to know you’ve selected a homeowners insurance policy and that it’s scheduled to begin on the day you close on the home, and they may also need to be listed on the policy so the insurance company can send them any updates and claim checks. They’ll usually handle this information exchange between themselves, but you’ll have to provide each company with contact information so they can coordinate.