While most people know you’re legally required to have car insurance before driving a new vehicle, there’s no similar legal requirement for buying a home. But if you’re taking out a mortgage on a property (which most homeowners do), you’ll have to provide the lender with proof of insurance — so yes, you do need home insurance to get a mortgage. We’ve got the answers to your questions about why mortgage lenders require home insurance, how much home insurance coverage you’ll be required to have, and more.
Why do you need proof of insurance to get a mortgage?
When someone lends you money to purchase a property, they count on you being able to pay them back, which means they have an investment in your property. Because they have an investment in it, a mortgage lender wants to make sure your property is fully covered in the event of damage or a catastrophic loss caused by a fire, hurricane, or other peril. By requiring you to have home insurance, the lender is protecting their investment.
The lender also wants to make sure that you’re financially able to continue paying off your mortgage even in the event that your property is destroyed. You likely wouldn’t want to continue paying for a home you can’t even live in, but your mortgage doesn’t just disappear, and you’ll still be required to pay it off. So, while the lender is protecting their investment by requiring you to have property insurance, they’re also protecting you from the financial hardship that would result from defaulting on your mortgage (or failing to pay) if your home is destroyed.
What is the minimum amount of home insurance coverage you need when you have a mortgage?
Most lenders require your property to be fully insured for its total replacement cost, as they want to make sure your home can be rebuilt in the event that it’s totally destroyed. Generally speaking, the coverage recommendation provided by your insurance company will be enough to meet your lender’s requirements.
Some lenders only require you to have insurance coverage for the amount you still owe on your mortgage — but this generally isn’t recommended, as it could leave you without adequate coverage in the event of an emergency.
What types of home insurance coverage are required by mortgage lenders?
Generally speaking, your mortgage lender will require that your home at least be protected against the following perils, which are included in most basic home insurance policies:
- Theft and vandalism
- Falling objects
- Fire and lightning
- Hail and wind damage
- Frozen pipes
- Riots or civil unrest
Depending on where you live, your lender may also require coverage for other perils, like windstorms, sewer backup, overland water (water entering your home from outside), or earthquakes. When you have an outline of the specific coverages required by your lender, your home insurance broker can help make sure you’ve checked everything off the list.
Should you get more home insurance coverage than what’s required by your mortgage lender?
Yes, you should get enough coverage to protect yourself and your property, regardless of the amount required by the mortgage lender. Since a mortgage lender’s main priority is making sure your property itself is covered, their requirements won’t account for your personal needs. Talk with your insurance broker about your situation to make sure you’re fully covered with adequate coverage for your belongings and a high enough third-party liability limit.
Coverage for your belongings
In addition to making sure you have enough coverage to rebuild your home in the event that it’s totally destroyed, you should also take a detailed home inventory and get enough coverage for all of your belongings. If you have any specialty belongings or valuables like jewelry, artwork, bicycles, collectibles, or antiques, you should get the right coverage for those, too.
Third-party liability coverage
You should also make sure you have enough third-party liability coverage This coverage protects you if you’re responsible for an injury or damage to someone else’s property. It covers things like legal fees, lawsuit settlements, and other related expenses — up to the limit in your policy, of course. Most home insurance companies automatically set your liability limit at $1 million. While this may be enough to cover most liability claims, many claims exceed $1 million, so consider increasing your limit. This is especially important if there’s anything on your property that could increase the chances of someone getting hurt (a swimming pool, a swing set, or pets, for example).
When you’re shopping for a new home, a licensed insurance broker can help make sure your coverage meets your mortgage lender’s insurance requirements. They can also help you compare home insurance quotes and make sure you get the coverage you’ll need in the event of an emergency.