Is home insurance required?

Home insurance is not required by law. But if you have a mortgage, your lender will require it to protect their investment in your house. If you own your home free and clear (meaning you have no loan), homeowners insurance is technically optional, but it's a very good idea. Insurance can shield you from expensive out-of-pocket repairs after severe weather, fire, theft, or an unexpected accident on your property.

When is home insurance required?

If you have a mortgage, your lender will require homeowners insurance — and for good reason. Since the bank has a significant financial investment in your property, it needs assurance that the home can be fixed or rebuilt if disaster strikes. Having insurance means the funds will be there to cover major damage from things like a fire or severe weather. Without this coverage, the bank could lose all the money they loaned you if you were unable to pay for repairs yourself, which is why it's a mandatory step in securing a home loan.

Is home insurance required by law?

No, there is no federal or state law requiring homeowners to buy home insurance. But just because the government doesn’t require it doesn’t mean your financial institution won’t. Your lender may also require you to carry flood insurance if you live in a flood-prone area.

Is home insurance required if you own your home outright?

If you’ve paid off your mortgage or bought your home outright, home insurance is not required. But forgoing a homeowners insurance policy can be risky. After all, your home is often your most valuable asset. 

Without insurance, you’d pay out of pocket for anything from a minor leak to a major fire. And home insurance goes beyond just the structure of your home; it can also cover your belongings and provide liability insurance in case you are responsible for someone else’s injuries or property damage, or someone files a lawsuit against you.

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

If you have a mortgage, going without home insurance isn’t really an option. If your policy lapses or you cancel it, the insurance company will notify the mortgage company because they’re listed as a loss payee or additional interest on your insurance policy. The lender will then buy force-placed insurance on your behalf.

There are several downsides to force-placed coverage:

• It’s much more expensive than a normal home insurance policy

• It primarily protects the lender, not you

• Coverage for personal belongings and liability is usually limited, if covered at all

Plus, the cost gets added to your mortgage until you provide proof of your own policy. So while you can go without home insurance, it’s not a good value and will cost you more than just buying a policy that benefits both you and your lender.

How much home insurance does a lender require?

Lenders typically require enough insurance to cover the full replacement cost of your home in case of total loss. The home’s replacement cost is not the same as its purchase price or market value, which includes the value of the land. Home insurance doesn’t cover land.

Your lender may require you to choose a specific deductible (or cap the deductible you’re allowed to select). The deductible is the amount of damage you’re responsible for covering out of pocket in the event of claimable damage. Then, insurance kicks in to cover the rest, up to your policy limit. For example, your lender may say you can’t have a deductible higher than $2,500. 

If you’re not sure how much home insurance you need, contact your insurer. Insurance companies have valuation tools to determine your coverage needs based on factors like your home’s age, square footage, construction and foundation types, and other characteristics. 

For personal property, it’s a good idea to complete a home inventory to determine how much coverage you need. And for liability, you’ll want enough coverage to protect your net worth in case you’re sued.

When do you need to get home insurance?

If you’re buying a house with a mortgage, you need homeowners insurance before closing. Lenders will ask for an insurance binder as proof of insurance before they will clear you to close on the property.

Here’s a general timeline for getting home insurance when buying a house:

1. Start shopping for insurance as soon as your offer is accepted.

2. Pick a policy. Set the policy effective date as your closing date.

3. Send proof of coverage with a paid receipt, or provide your lender with billing info if you’ll be paying through an escrow account.

4. Follow up with your insurance company before your closing date to ensure the policy is active to avoid any penalties or unexpected issues.

Waiting too long can delay closing, so it’s best to handle this early in the buying process. Don’t forget to notify your insurance company if your settlement date changes, especially if you close earlier than the date on your policy.

Frequently asked questions

Do I need homeowners insurance if I pay cash for a house?

No. If you pay cash for a house or own it outright, you’re not required to have homeowners insurance. But without it, you’re on the hook for everything, including repairs after a covered claim, liability, and total loss situations (like a fire). Most homeowners consider home insurance worth the cost for the peace of mind it provides.

What is force-placed insurance?

Force-placed insurance is a policy your lender purchases to cover your home after your insurance policy lapses or is canceled. However, it protects the lender's financial interest in your home — not yours. Plus, it’s usually a lot more expensive than a standard home insurance policy. It’s best to purchase coverage on your own.