The lender needs proof of homeowners insurance and the cost immediately after you receive an accepted offer on a home. Not having insurance in place will delay your closing.
Excited about purchasing a home? This process involves a lot of moving parts and expenses. Before moving on, in addition to making a down payment on your mortgage loan and paying for closing costs, you’ll also likely need to get homeowners insurance. This coverage safeguards you against costly perils like storms, fire, theft, and more. Going without homeowners insurance is risky and, if you are financing your home, typically not allowed.
When Do You Need To Find an Insurance Provider During the Homebuying Process?
It’s recommended to choose your insurance carrier even before you make an offer on a home. This way, you can get proof of coverage to your lender as soon as you receive an accepted offer.
Homeowners insurance premiums are part of your debt-to-income, or DTI, ratio, which impacts approval. The lender won't guess your premium after you've found a home. Doing so could result in a denial later if premiums are underestimated.
Your insurance binder – the document that proves coverage – should show an effective date no later than closing.
“Ideally, your new policy would need to be in effect the day you legally own your home – the closing date,” says Travis Hodges, managing director of VIU by HUB.
Are You Required To Purchase Homeowners Insurance?
Truth is, you are not legally required to have a homeowners insurance policy when buying and owning a home.
“There are no state or federal laws that require a homeowner to purchase property insurance,” says Mark Friedlander, senior director of media relations for the Insurance Information Institute (Triple-I). “However, most mortgage lenders require their customers to purchase a home insurance policy.”
Lenders require home insurance to lower their risk involved with lending you money.
“If a home is severely damaged or destroyed, you have little incentive to pay back your loan. So having coverage means that the home insurance settlement will ensure the lender gets paid,” explains Melanie Musson, a home finance expert with Quote.com.
If you don’t secure coverage, your lender will purchase force-placed insurance on your behalf – which is often much more expensive and offers less protection.
If you pay cash for your home, or after your house is eventually paid off, home insurance is still strongly recommended by the experts. That’s because you probably couldn’t afford to pay fully out-of-pocket to repair or rebuild your home in the event of a catastrophe. Or, if someone wanted to sue you for being injured on your property, the legal costs and settlement involved could wipe you out financially.
How Much Does Homeowners Insurance Cost?
The price you will pay for coverage will depend on many factors, including your location, the size and age of your property, and your history of filing previous claims.
“For example, home insurance in Florida along the coast will cost much more than home insurance in Idaho near the potato fields,” says Musson.
Due in large part to widespread and catastrophic losses following wildfires, hurricanes, and other natural disasters, homeowners across the country are paying much higher rates today. Premiums in recent years have jumped from an average of $2,656 in 2021 to $3,303 in 2024, per a recent Consumer Federation of America report.
What Does Homeowners Insurance Cover and Not Cover?
Four in five American homeowners purchase what is called an “HO3” policy. This standard homeowners insurance policy typically covers against several common perils that can damage or threaten your property and possessions. These include windstorm and hail; fire and lightning; smoke; theft and vandalism; falling objects; weight of ice, snow, and sleet; freezing of household systems; riots and civil disturbances; damage by aircraft or vehicles; accidental discharge or overflow of water or steam; and even volcanic eruptions.
“Your insurance policy has two basic components: casualty and liability coverage,” notes attorney Thomas Simeone. “Casualty pays you if your property is damaged by fire, storm, vandalism, and the like. Liability protects you in case someone makes a claim against you for damages due to an accident on the property – such as a slip and fall on your sidewalk.”
Homeowners insurance policies can generally be used for personal liability protection, such as if a bicycle rider is injured on your property or your dog bites the mail carrier.
But your policy won’t cover everything. Among the exclusions are damages caused by earthquakes, floods, mudslides, sinkholes, pest infestations, mold, earth movement, insurrections, or war; other structures on your property not already listed on your policy; and routine wear and tear. You may be able to obtain coverage for many of these things via riders/endorsements or separate policies.
What Coverage Levels Are Recommended?
The amount of insurance protection you should have in place can vary depending on your property, budget, and tolerance for risk. But you want to at least ensure you have adequate replacement cost coverage (called “Coverage A”) so that you can repair or rebuild your home after suffering a major loss, while also factoring in rising expenses for construction labor and materials.
“In recent years, a high percentage of policyholders who suffered a catastrophic loss learned the hard way they were underinsured from damage caused by tornadoes, hurricanes, and wildfires,” cautions Friedlander.
Replacement cost and actual cash value (ACV) are two different methods insurance companies use to reimburse you for stolen or damaged property. The former covers the full cost to replace the item with a new one of similar quality and kind, without deducting for depreciation. ACV accounts for depreciation, meaning you'll be paid what the item is worth today, not what you originally paid. If you can afford it, it’s better to opt for replacement cost, but it comes with a higher premium.
“Keep in mind that mortgage lenders typically require their customers to have enough coverage to rebuild their home in case of severe damage or destruction, often up to the replacement cost of the dwelling,” Friedlander continues.
When it comes to liability coverage, “you should have enough to pay for any claims that could be made against you to protect against your assets – including your home itself – being taken away to satisfy a claim. In other words, purchase the most liability coverage available that you can afford,” recommends Simeone.
Your carrier will set your coverage levels based on your home’s value and the cost to rebuild or repair. Also, they will cover personal belongings as a percentage of your home’s value.
According to Triple-I, home insurance policies typically include at least $100,000 in liability protection, but many pros today suggest boosting that amount to between $300,000 and $500,000 for better coverage. If your assets – like property, savings, or investments – exceed your policy’s liability limit, it’s wise to add an umbrella policy or excess liability policy to help shield your assets.
Also, standard homeowners insurance often includes low coverage limits (commonly below $2,000) for high-value items like jewelry, collectibles, or computers, so it’s important to review your policy and consider adding a personal property floater or endorsement for better protection.
What Happens if There’s a Claim?
If your home suffers damage or loss, you’ll need to contact your carrier or insurance agent and officially file a claim. Your insurer will carefully investigate the damage or loss. A claims adjuster may phone or visit your property to evaluate the situation, ask for more details, and request proof of the claim via receipts, photos, or home inventory. After verifying your claim and confirming coverage, you’ll be offered a payout based on the terms of your policy: either at replacement cost or ACV. After you pay your predetermined deductible (often between $500 and $1,000), you’ll receive your funds, which can be used to repair, replace, or rebuild the damaged or lost item yourself or via a hired contractor.
If, on the other hand, you are sued due to an injury or property damage incurred by a guest on your property, your policy may foot the bill for legal expenses, court costs, and settlements up to your liability limits. Your insurer may also provide an attorney to defend you during the lawsuit.
How and When Do You Pay for Coverage?
If you are preparing to buy a home, note that a full year’s premium (to cover 12 months) is typically required ahead of time – due at closing as part of your closing costs.
“Most people put their home insurance premium funds into escrow. This means your lender will collect your insurance costs in monthly installments as part of your mortgage payment and then pay your insurance company directly on your behalf,” adds Munson.
If you want to pay your carrier directly, you can do so without escrow if your lender allows it. But you’ll likely still need to prepay the first year of coverage at closing.
How Can You Save Money on Homeowners Insurance?
It pays to shop around for homeowners insurance among several different companies.
“We recommend getting at least three comparable quotes from different carriers. You can obtain quotes through online quote comparison sites, insurance agents, and directly from insurers,” suggests Friedlander. “Just be aware that several insurers require you to work with their exclusive or independent agent to obtain quotes and purchase the policy.”
Several factors can help lower your rates, including:
A strong credit history and a high credit-based insurance score (a numerical rating based on your credit history and other factors that carriers use to predict the likelihood of you filing a claim)
A history of few or no previous homeowners insurance claims
Bundling policies, such as homeowners insurance and auto insurance policies, with the same carrier
Increasing your deductible. For example, opting for a $1,000 deductible instead of a $500 deductible. “More consumers are learning today that they can share in the risk, thereby reducing their premium. That said, while raising your deductible can reduce your premium, it increases your out-of-pocket costs if you file a claim,” says Hodges.
Building or retrofitting your property with more desirable materials.
Installing safety features like an alarm system and security cameras
- Qualifying for discounts, including:
Pay-in-full discount. Pay your entire premium upfront to save 5% to 10%.
Paperless billing discount. Choose email statements and save 5% to 10%.
Claims-free discount. Maintain a clean claims history and earn 5% to 20% savings.
Retiree/senior discount. Some insurers offer 5% to 10% off for homeowners over a certain age.
Security system discount. Get 5% to 15% off when you have a professionally monitored burglar or fire alarm.
Roof condition discount. Have a newer or recently replaced roof and save 5% to 15%.
Gated community discount. Live in a gated or secure community and potentially save 5% to 10%.
Home safety discount. Install deadbolts, smoke detectors, and fire extinguishers to save 2% to 5%.
New home discount. Own a recently built home and get 10% to 20% off, depending on the home's age and condition.
Loyalty discount. Stay with the same insurer for several years and earn 5% to 10% savings.
Military discount. Active and former military members may receive 10% to 20% off.
FAQs
What if you cannot afford homeowners insurance?
If you are financing the purchase of a home with a mortgage loan, you are typically required to have homeowners insurance coverage. Without it, you could be put in default or your lender could make you pay for force-placed insurance that is up to 10 times more expensive than what a standard home policy costs. Before committing to a home purchase, ensure that you have ample wiggle room to afford associated ownership costs, including homeowners insurance, maintenance and repairs, and other out-of-pocket expenses.
If you cannot afford coverage because carriers are withdrawing from your region due to higher underwriting risks, such as being located in a wildfire zone, you may qualify for state-sponsored insurance via a Fair Access to Insurance Requirements (FAIR) plan; this provides coverage for those who can’t secure it through the standard market.
If you are buying a home fully with cash and need to save money, you are not required to purchase homeowners insurance, although the experts strongly recommend having it in place.
Can you be turned down for coverage?
If you are denied coverage by one carrier, you can try shopping for coverage from a different carrier. But you will likely pay a higher premium if the risk of a claim is high.
In some high-risk areas of the country that are vulnerable to severe weather and climate hazards, the availability of home insurance can be challenging. Fortunately, most states have a Fair Access to Insurance Requirements (FAIR) plan, which offers coverage to homeowners who cannot secure it via the standard market. Another option is buying coverage through a surplus lines carrier, which provides coverage in high-risk locations. However, surplus line rates do not require regulatory approval and could be very expensive compared to a standard policy sold through the traditional market.
When is flood insurance required?
Flood insurance is only required when you have a mortgage and live in a high-risk flood zone. The Insurance Information Institute recommends that all homeowners consider purchasing flood insurance, even if you don’t live in a high-risk zone, as flooding is the most underinsured hazard in the country today.
