Courtney Washington is a Texas A&M University graduate. Her extensive knowledge and background in auto, home, and umbrella policies make her a one-stop shop for insurance advice and information. She loves to help her readers understand their insurance choices so they can make informed decisions about their coverage.
3+ years experience in insurance and personal finance editing
NPN: 20564519
Katie uses her knowledge and expertise as a licensed property and casualty agent in Massachusetts to help readers understand the complexities of insurance shopping.
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Though state laws don’t require home insurance coverage, they regulate it for people who choose to have it. Lenders will likely require homeowners with a mortgage on their house to carry home insurance. Because mortgage or home equity loan holders want to protect their investment, homeowners must keep coverage if they take out a loan on the property.[1]
Here’s what you should know about homeowners insurance requirements.
Who requires home insurance, and why?
Mortgage lenders want to protect their investment while they still carry the note. Therefore, they require homeowners to secure property insurance before closing and carry it until they pay it off. 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 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. However, 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.[2]
Good to Know
Home insurance coverage from state to state is usually the same. However, 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 require property owners to carry actual cash value (ACV) coverage on their homeowners insurance policy. The ACV for the home is however much it costs to rebuild it from scratch. Carrying at least 80% of the total rebuild price on the policy typically provides enough insurance money to replace significant amounts of the home if it incurs damage. Homeowners would only have to come up with 20% of the cost to rebuild the house in a worst-case scenario.
Mortgage companies usually find the coverage amount by estimating how much your home would cost to rebuild per square foot and multiplying it by the house’s square footage. 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.
You also have to decide how you want to pay for your homeowners insurance. Some homeowners pay the entire amount directly to the insurer at the beginning of each policy period. If you put down less than 20% for the purchase of your home, the lender will require you to use an escrow account.
With an escrow account, the homeowner pays a single monthly payment that includes the principal and interest on the mortgage loan. They’ll also pay the monthly home insurance payment and any other escrow payments that month.
What homeowners insurance covers
All insurance companies offer the standard HO-3 policy. HO-3 insurance coverage protects against the following perils:
Windstorm
Hail
Vandalism
Fire
Lightning
Falling objects
Theft
Tornadoes
Smoke
Other natural disasters
Here are the different parts of an HO-3 policy:
Dwelling coverage
Dwelling coverage protects the home’s structure and any attached structures, like a garage or a porch.
Personal property coverage protects the personal belongings you would take with you if you moved. You can list more expensive items like jewelry, rare coin collections, furs, or fine art separately on a homeowners policy — but only up to a certain amount. You can secure separate endorsements or policies if the scheduled items are worth more than the maximum offered.
Personal liability coverage
Personal liability coverage protects you financially if you’re legally responsible for a guest’s injuries or property damage. For example, if your dog bites someone, liability insurance would pay your legal fees.
Medical payments coverage
Medical payments coverage pays for medical expenses after a covered incident.
Loss of use coverage
Loss of use coverage helps pay for living expenses after a covered loss. Coverage also goes to a temporary living space while repair crews fix the home.[3]
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Most expensive states for homeowners insurance
Insurance rates vary by state because the likelihood of different weather-related perils varies by state. The following states are three of the most expensive states for homeowners insurance:
Florida
Florida is a peninsula almost entirely surrounded by water, which makes many homeowners vulnerable to the yearly hurricanes that sweep over the state.
Louisiana
Although Louisiana is further inland, the way the city infrastructure manages floodwaters makes it especially vulnerable to anything more than a Category 3 hurricane.
Oklahoma
Oklahoma is one of the busiest states in the country for tornado activity. The high winds that come with tornadoes can devastate any structure, no matter how well-built.
Below, you can find the average annual premiums for home insurance in 10 of the most expensive states for buying home insurance. The coverage amount for the home is $300,000, and the deductible is $500.
Table data sourced from real-time quotes from Insurify’s partner insurance providers and quote estimates from Quadrant Information Services. Actual quotes may vary based on the policy buyer’s unique profile.
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 car 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 inquire about discounts with your home insurer to see what you qualify for.
Maintain good credit. Having good credit makes you a lower-risk policyholder for companies to insure.
Homeowners insurance FAQs
If you have a home, it’s a good idea to purchase homeowners insurance. Understanding the facts about how much coverage you need is crucial. Learn more below.
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. However, 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.
Does homeowners insurance cover flooding and earthquakes?
Not typically, but you can add those coverages to your policy through add-ons. Standard insurance policies often exclude coverage for flood and earthquake damage in their coverage. However, if you live in an area prone to flooding or earthquakes, it might be a good idea to add those coverages to your policy.
Do you need homeowners insurance if you paid off your mortgage?
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.
Courtney Washington is a Texas A&M University graduate. Her extensive knowledge and background in auto, home, and umbrella policies make her a one-stop shop for insurance advice and information. She loves to help her readers understand their insurance choices so they can make informed decisions about their coverage.
3+ years experience in insurance and personal finance editing
NPN: 20564519
Katie uses her knowledge and expertise as a licensed property and casualty agent in Massachusetts to help readers understand the complexities of insurance shopping.
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