In short… No. There is no federal or state law requiring you to purchase homeowners insurance. However, the mortgage lender holds every right to require you to buy a policy before allowing you to take out a loan.
In most cases of the home buying process, the mortgage lender will require you to purchase an insurance policy. It’s rare that you will come across one that will allow you to take a loan out without homeowners insurance. So unless your house is paid off or you are buying it cash, you will most likely have to get home insurance coverage.
Insurance is a gamble in itself. An expensive gamble. You could go the whole course of your home ownership without anything happening to your home in which case you have wasted your money on the insurance, or, you could go without insurance and then have your house catch fire and the person responsible for paying is you.
Why would Homeowners Insurance be required?
There are countless reasons why a mortgage lender would need you to buy insurance. To put it simply, they want to protect their own money first. They are lending you, the homeowner, a whole lump of cash they expect to get back. Without insurance, there’s no guarantee that you can pay them back in the case that your home gets damaged.
They are investing in you and your ability to repay your mortgage. Homeowners insurance is a way to protect their assets and guarantee they don’t lose money on their investment. It makes sense why they would require it. You wouldn’t want to throw money to someone who can’t guarantee they can pay it back to you.
Most mortgage lenders will require some form of liability coverage in the case that the damage was caused by yourself. This might not seem like something you need. It’s your home and you’re going to do everything in your power to prevent damage from coming to it, right? Well everybody at one point or another forgets to turn off the stove. No matter how hard you try, we’re human. We aren’t perfect and liability coverage is there to protect that.
Who should get Homeowner’s Insurance?
Each experience of home-owning is different. More often than not some sort of damage will come to your house in your time living there and you will be held financially responsible to cover the cost of repairs. Homeowners insurance is a “just in case” provision – an important and expensive provision.
Anyone is at risk of damage coming to their home at any time, however, there are a host of homeowners who run a greater risk of disaster. While disaster can strike at any moment there are ways to tell if your chances are worse off than others.
- Older Homes – Homes that were built a long time ago can run a higher risk of disaster. A home that hasn’t been updated in a long time or even since it was first constructed might be at risk of fire, flooding, collapse, etc. You may find that your home was built under loose guidelines leading to faulty wiring or rotting structures. Homeowners insurance would protect you in the case that this leads to damages.
- Disaster Prone Areas – If your home is situated directly in the path of tornado alley it might be a good decision for you to purchase home insurance. Same can be said for fault lines or flood ridden areas. Basically, if there are common occurrences of disasters in your area, don’t guess and assume they won’t happen to you.
- Clumsy Family – While a funny concept, it is a common threat to your home. This relates to the liability coverage mentioned above. Even if you believe yourself to be careful and sure-footed… often times you’re not. Whether it be you, a family member or a friend visiting there is always a chance of damages caused by your actions. Liability coverage protects you in these accidental cases.
There are many reasons as to why you might wish to look into purchasing homeowners insurance. You never know what could happen to your home – disaster or self-inflicted – and the safer route is to insure your home, so you don’t wind up paying outrages loads of money to repair the damages.
Who can forgo Homeowner’s Insurance?
As I’ve said before – insurance is a gamble. You don’t know if you’ll need it in the end but there is always a chance you might. When playing the insurance game, one of four things can happen:
- You buy insurance and end up needing it.
- You buy insurance and don’t use it.
- You forgo insurance and don’t need it.
- You forgo insurance and need it.
Let’s imagine that you’re the one who gets lucky and decides not to purchase insurance and never ends up needing it. What are some cases where forgoing the purchase is more acceptable and less of a risk?
- Setting money aside yourself – You decide not to invest money into the insurance company to give you a policy but rather set aside your own money to cover the damages of any potential disasters. A recommended tactic would be to set these funds into an escrow and use it for disasters. This provides some financial backing for emergencies without forcing you to deal with an insurance company.
- The home is already yours – If you already own the home and have no more need of dealing with a mortgage lender then by all means! It’s your house, do as you please. No one can force you to have homeowner’s insurance. Owning the house outright, however, does not decrease the possibility of damages. A tree could still fall, and someone would have to pay for repairs.
Do your research on policies
Homeownership is a tricky business. There’s no guarantee on if you’ll ever need homeowners insurance but also no guarantee your house will never be damaged. As I said, insurance is a “just in case” provision. It’s there to protect both you and the mortgage lender against significant financial loss.
It’s important to know that if you do plan on purchasing insurance or are required to by your lender, not all policies fit you. Before you purchase a policy, research your area. See what policies might be best suited to you and your neighborhood. Shop around to get a good deal on your policy. Find the company and policy that is perfect for you and your home.
