If you’ve invested tens of thousands of dollars in buying your home or have signed your name to a five- or six-figure mortgage, it’s easy to see the good sense of insuring your home against damage. But determining how much homeowner’s insurance you need is far less straightforward.
That’s because homeowner insurance requirements vary by state as well as by mortgage lender. Only homeowners without a mortgage can opt out of coverage. But even then, conventional wisdom dictates you insure your home anyway, as catastrophic damage to your home would likely be catastrophic to your finances.
For everyone with a mortgage, taking out a homeowner’s insurance policy is mandatory, and activating it at closing is necessary to complete the mortgage process. That’s because homeowners with mortgages share ownership of the home with their lender. If damage to your home impacts its value, the bank’s asset is degraded, potentially dropping it below the value of the loan they’ve extended. So homeowner’s insurance protects your finances as much as it protects your lender’s bottom line.
So what do lenders require? Lender stipulations dictate two types of coverage: the dwelling itself and your liability. Dwelling coverage addresses the cost of repairing or rebuilding the home to restore its value, while liability coverage prevents anyone from going after your home in a lawsuit.
Not required for purposes of a mortgage are coverage for the land, your belongings inside the home, any external structures, or the cost of living elsewhere while your home is restored. Clearly these are important additional protections for most homeowners.
Depending where you live and who your lender is, the minimum dwelling and liability coverages will be communicated to you. But be prepared to discuss all the coverage options with potential insurers to establish a policy that fully protects your interests.