Are you legally required to have home insurance?

Generally, homeowners are not required by law to have home insurance. But mortgage lenders set homeowners insurance requirements. For borrowers with a mortgage, that means the answer to the question, "Is homeowners insurance required?" is a definite yes. Home buyers need to provide proof of coverage before closing on a home loan. If homeowners don't maintain their own hazard insurance, lenders can buy force-placed insurance. It typically comes at a high cost. It ensures the home is protected against loss to protect the lender's interest in the property.

What insurance is required for a mortgage?

Lenders set homeowners insurance requirements borrowers must meet. These are outlined in the mortgage loan terms. They are usually explained under the "scope of coverage" clause. Generally, lenders require borrowers to have hazard insurance. This protects against common sources of damage, like fires, wind, and vandalism. For homes in flood zones, additional flood insurance may be required. Coverage limits typically need to be large enough to fully repay the loan, or to replace the home in full if it's completely destroyed.

Do you need home insurance if your house is paid off?

Lenders generally set minimum home insurance requirements. But no law requires homeowners to have insurance. So the answer to the question, "Is homeowners insurance required?" is a no for homeowners with paid-off properties. But it's important to buy a policy even though it's not mandatory. Homeowners insurance pays to repair or replace a home if it's damaged or destroyed. It can also pay to repair or replace the contents of the home. And it can cover damages if a claim is made against a homeowner for injury on their property. Without coverage, a homeowner could be forced to pay out of pocket to build a new home. They might have to pay to replace all their personal possessions, and they could be forced to cover a victim's losses after an injury. This could mean paying hundreds of thousands, or even millions, of dollars. Going without insurance is too much of a risk.

What happens if you have a mortgage and no homeowners insurance?

A lender can buy force-placed insurance if a property owner fails to meet minimum homeowners insurance requirements, which can be very expensive. A lender could also send the loan into default for breach of the loan terms, resulting in foreclosure.

Is Homeowners Insurance Required by Lenders?

Updated Sept. 15, 2023

By: Christy Bieber and Kristi Waterworth

Our Insurance Experts

Fact Checked Ashley Maready

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Buying a home means taking on additional expenses to protect that home. This includes costs like homeowners insurance, which is a requirement of each and every home mortgage lender. Read on to better understand the minimum requirements for home insurance.

Do mortgage lenders require homeowners insurance?

Is homeowners insurance required? For borrowers with a mortgage, the answer is yes. Lenders establish homeowners insurance minimum requirements to protect their investment in your property. You'll find these spelled out in the mortgage loan terms. Lenders typically include a "scope of coverage" requirement, which specifies the minimum homeowners insurance requirements borrowers must fulfill.

Borrowers should shop around for homeowners insurance discounts. Getting quotes from the best homeowners insurance companies can help you get the required coverage at an affordable price.

Homeowners must provide proof of coverage before closing on a home loan. Those who already have a loan must continue to meet homeowners insurance minimum requirements. If you drop it, your lender will be notified. In that case, lenders generally buy far more expensive insurance on your behalf, commonly referred to as force-placed coverage. If your lender doesn't put its own insurance in place, it can instead declare the loan in default, which could result in foreclosure.

Many mortgage lenders require borrowers to make monthly payments toward home insurance as part of their mortgage payment. The lender collects the money and puts it into a special escrow account where it's held on behalf of the homeowner. When the insurance premium is due, the bill is sent to the lender and it's paid out of the escrow account. This way, insurers make certain borrowers fulfill homeowners insurance requirements.

How much home insurance is required by lenders?

Homeowners insurance requirements vary by lender. Borrowers can check their mortgage loan documents for "scope of coverage" requirements. These will explain their homeowners insurance requirements.

Homeowners insurance requirements generally specify the type of required coverage. They also establish the amount of required coverage. Borrowers generally must have enough coverage to fully rebuild the home if it's destroyed. Some lenders let borrowers maintain only enough coverage to repay the remaining loan balance.

Minimum home insurance policy requirements

Homeowners insurance requirements vary by lender. For any homeowner, one of the basics of buying homeowners insurance is to understand their lender's minimum home insurance requirements.

Knowing what home insurance generally covers is important for every property owner. Many homeowners buy more coverage than what's required to meet their lender's requirements.

Here are the types of protection borrowers either must have or may want to add.

Hazard coverage

Typically, the minimum home insurance requirements include hazard insurance. This generally pays for damage caused by:

Wind
Hail
Smoke
Fire
Vandalism
Civil commotion (such as riots)

When a hazard is covered by a homeowner's policy, the insurer pays to repair damages. If the home is completely destroyed, the insurer pays to rebuild. If a property owner has replacement coverage, the insurer pays to rebuild the home as it stands. If a property owner has market value coverage, the insurer pays what the home is worth.

Flood insurance

In some cases, homeowners insurance requirements extend beyond standard hazard insurance. For example, flood insurance may be required for homes in flood zones.

Liability coverage

Liability coverage isn't generally required, but it's an important type of coverage. That's because homeowners could be held liable for losses if someone is injured on their property.

Liability insurance pays for legal bills if a homeowner is sued. It can also cover any monetary losses, such as the victim's lost wages and medical bills.

Personal property

Property owners may also want coverage for their personal possessions. This is not generally required by mortgage lenders. But without it, they would have to pay out of pocket to replace their belongings if they were destroyed in the home.

Why do mortgage companies require homeowners insurance?

Mortgage lenders have homeowners insurance requirements because the home acts as collateral on a mortgage, meaning that the home guarantees the loan. If a homeowner doesn't pay, the lender can seize the property and sell it to recover the money for the unpaid loan balance.

However, if the property is destroyed, the homeowner likely wouldn't have the money to rebuild it without an insurance policy in place. Lenders set homeowners insurance requirements to make sure insurance companies pay for repair or replacement of the property. This protects the home and ensures it retains enough value to continue to serve as collateral.

FAQs

Generally, homeowners are not required by law to have home insurance. But mortgage lenders set homeowners insurance requirements. For borrowers with a mortgage, that means the answer to the question, "Is homeowners insurance required?" is a definite yes.
Home buyers need to provide proof of coverage before closing on a home loan. If homeowners don't maintain their own hazard insurance, lenders can buy force-placed insurance. It typically comes at a high cost. It ensures the home is protected against loss to protect the lender's interest in the property.
Lenders set homeowners insurance requirements borrowers must meet. These are outlined in the mortgage loan terms. They are usually explained under the "scope of coverage" clause.
Generally, lenders require borrowers to have hazard insurance. This protects against common sources of damage, like fires, wind, and vandalism. For homes in flood zones, additional flood insurance may be required.
Coverage limits typically need to be large enough to fully repay the loan, or to replace the home in full if it's completely destroyed.
Lenders generally set minimum home insurance requirements. But no law requires homeowners to have insurance. So the answer to the question, "Is homeowners insurance required?" is a no for homeowners with paid-off properties. But it's important to buy a policy even though it's not mandatory.
Homeowners insurance pays to repair or replace a home if it's damaged or destroyed. It can also pay to repair or replace the contents of the home. And it can cover damages if a claim is made against a homeowner for injury on their property.
Without coverage, a homeowner could be forced to pay out of pocket to build a new home. They might have to pay to replace all their personal possessions, and they could be forced to cover a victim's losses after an injury.
This could mean paying hundreds of thousands, or even millions, of dollars. Going without insurance is too much of a risk.
A lender can buy force-placed insurance if a property owner fails to meet minimum homeowners insurance requirements, which can be very expensive. A lender could also send the loan into default for breach of the loan terms, resulting in foreclosure.

Our Insurance Experts

By: Christy Bieber

Writer

Christy Bieber is a full-time personal finance and legal writer with more than a decade of experience. She has a JD from UCLA as well as a degree in English, Media and Communications with a Certificate in Business Management from the University of Rochester. In addition to writing for The Ascent and The Motley Fool, her work has also been featured regularly on MSN Money, CNBC, and USA Today. She also ghost writes textbooks, serves as a subject matter expert for online course design, and is a former college instructor.

By: Kristi Waterworth

Kristi Waterworth has been a writer since 1995, when words were on paper and card catalogs were cool. She's owned and operated a number of small businesses and developed expertise in digital (and paper) marketing, personal finance, and a hundred other things SMB owners have to know to survive. When she's not banging the keys, Kristi hangs out in her kitchen with her dogs, dropping cheese randomly on the floor.