Buying a new home is an exciting time. There’s a lot to think about, from choosing the right neighborhood to deciding on a color scheme for your new digs. In many ways, your new home says a lot about you and the life you want to live.
That’s the fun part. However, buying a home also brings a whole list of things to do and decisions to make — and many of these choices have huge financial implications.
But many new home buyers wonder — is homeowners insurance required? For many buyers, homeowners insurance isn’t optional — and for the rest, there are plenty of important reasons to purchase a robust policy anyway.
Here’s what you need to know.
What is homeowners insurance?
To start, let’s define homeowners insurance. Also known as home insurance or hazard insurance, homeowners insurance protects you from financial loss if anything happens to damage your home or its contents. For most people, a house is the single biggest purchase they’ll ever make, and it’s unlikely that you’d be able to simply buy another one if something happened to yours. Insurance pays you an agreed-upon amount to cover damages and losses so you can find new shelter and/or repair your home.
In many ways, homeowners insurance is similar to car insurance. Like car insurance, a homeowners policy will pay you only for what it lists as covered damages, though you can choose to go beyond the basics to purchase additional coverage for other areas. For example, standard home insurance policies don’t cover flood damage, but you can purchase additional flood insurance if you live in a high-risk area. Likewise, you may choose to purchase additional riders to cover valuables like jewelry and expensive artwork.
Is homeowners insurance required by law?
In short, the law does not require home buyers to purchase homeowners insurance, but there are many reasons as to why it is essential. When you are buying a home and asking yourself “Do I need homeowners insurance?” or “Am I required to have homeowners insurance?”, what you should also be considering is what could happen if you don’t have homeowners insurance when disaster strikes.
While the odds of your home being struck by lightning or burning to the ground are pretty slim, you simply never know when some smaller catastrophe will strike. Strong storms can bring hail or tree limb damage, or a guest could trip on your curb and break an ankle. Homeowners insurance policies allow you to pay for these costs without a serious interruption to your budget and lifestyle.
Do you have to have homeowners insurance when you take out a mortgage?
For most home buyers, insurance isn’t optional. That’s because only 16% – 25% of home sales are all-cash transactions — the rest are financed. Mortgage lenders tend to be pretty strict when they give out money, and one big requirement of buyers is that they insure their property.
That brings us to the lucky few home buyers who don’t need to finance their purchase. Whether you inherited your home, just paid off your mortgage, or are independently wealthy, you may ask: should I still buy insurance if no one is making me?
Yes, you should. Unless you are truly well off enough to replace your home and its contents in the event of a natural disaster, insurance coverage is important. Remember, home insurance will pay to repair or replace your home and all of the possessions you hold inside of it. It will also protect you in the event of expensive lawsuits and help make sure that you can afford shelter if your home becomes uninhabitable. This is important protection — not to mention peace of mind — for anyone who is less than a zillionaire.
And just in case you think a catastrophe could never happen to you: 1 in 20 insured homeowners file a claim for damages each year. You might get lucky for several years or even decades, but over your lifetime, it’s likely that you’ll need to file at least a small insurance claim for your home.
It’s best to be prepared with solid insurance coverage.
Why do you have to have home insurance for a mortgage?
Homeowners insurance doesn’t just protect you as the homeowner. It also protects your lender. When a bank lends you money or a home, the house is the collateral. That means if you fail to pay back what you’ve borrowed, the bank can foreclose and sell the house to recoup their losses. For that reason, it is in the bank’s best interest to make sure your house stays in a sellable state.
So if your home is swept off its foundation by a tornado, the bank has a vested interest in seeing that the house is repaired or replaced — after all, an inhabitable house will sell for more than an empty lot. That’s why nearly every mortgage — whether backed by government programs like the FHA and VA or obtained privately from commercial lenders — comes with a requirement to maintain a minimal insurance policy on the property.
The bottom line: if you have to borrow money to buy your house, you’ll have to purchase homeowners insurance as well.
When do you need homeowners insurance?
As a new home buyer, if you’re wondering when to get homeowners insurance when buying a house, you’re not alone. There are many moving parts and many boxes to check when finding your next home, so it’s best to start shopping around and securing your new house insurance sooner rather than later.
Once your offer is accepted and you sign the contract for the home, you should start getting quotes for homeowners insurance. On average, you will have about a month or so between the time you sign the contract and actually close on the house. This may seem like a lot of time, but it goes by quickly. Taking action right away will allow you to get a policy locked into place before the closing happens and the house officially being under your name.
For those asking “Do I have to have homeowners insurance before the closing?” — the answer is yes. Typically, you will need to prove at hat you’ve paid the first full year of premiums on your new homeowners insurance.
5 reasons why you must buy homeowners insurance
Still not convinced you should have house insurance? Here are 5 reasons:
Reason 1: Dwelling Coverage
One reason to buy homeowners insurance is to protect attached garages and decks, which are usually included in your home insurance coverage. Some home insurance plans also include other outbuildings on your property, such as a shed, detached garage, etc.
Reason 2: Personal Property Coverage
If something happens to severely damage your home, odds are good that at least some of your furniture, interior fixtures, and possessions will also be affected. Most policies provide coverage to replace these damaged items as well.
Reason 3: Theft Protection
Natural disasters aren’t the only thing that can affect your home. Homeowners insurance also covers loss due to theft or repairs to clean up damages from vandalism.
Reason 4: Personal Liability
Accidents happen, but you can be sued if someone is hurt on your property. For example, if someone slips on ice in your driveway and needs their medical bills covered, your insurance will pay for these costs.
Reason 5: Living Expenses
If your home is damaged so severely that you can no longer live there, good insurance policies will cover the cost of renting alternate rooms while repairs are made.
Is home insurance required? Key takeaways
If you’re buying home insurance for the first time, you’ve likely questioned if homeowners insurance is required. Legally speaking, it is not, but it’s still an important piece to add to your new life as a homeowner. Most mortgage lenders won’t finance a home buyer if they are not insuring their home because they need to make sure the property is protected should they ever have to confiscate it as collateral. Even those who are fortunate enough not to need financing to purchase a home will benefit from homeowners insurance. Unless you are able and willing to buy a new home should a catastrophe happen, replace your personal possessions if they are stolen, and/or pay for any accidents that require medical attention, house insurance will be there to protect you and prevent you from having to do so. For additional protection, purchasing a home warranty may also be in your best interest.
Looking for more great help and advice as you prepare to buy a home? HomeGauge is here to help! Check out our learning center for more helpful tips today.