There’s Just No Getting Around It: Homeowner’s Insurance Is Mandatory for Mortgage Holders

There’s Just No Getting Around It: Homeowner’s Insurance Is Mandatory for Mortgage Holders

You can’t secure a mortgage without homeowner’s insurance. If you cancel coverage after closing your loan, your lender may impose a “lender-placed” or “force-placed” policy on your property. This requirement is buried in your loan documents. While you must insure the lender’s collateral (your home), you don’t need to insure the land itself—soil can’t burn or be stolen. After closing, you may reduce coverage to the home’s value, excluding the land. However, cutting back too far could leave you underinsured for future losses.

Types of Insurance Policies

Insurance options vary based on your property type:

• Older homes often use actual cash value policies, which deduct depreciation from payouts.
• Condominiums typically require policies covering personal belongings and owned structural elements.

For most homeowners, the choice is between:

• HO2 policies (covers 16 named perils).
• HO3 policies (covers all perils except those explicitly excluded).

HO3 is the most popular, offering protection against:

• Fire, lightning, windstorms, hail, riots, vandalism, theft, and falling objects.
• Damage from vehicles, aircraft, snow/ice weight, plumbing leaks, and appliance malfunctions.

Coverage Options: Actual Cash Value, Replacement Cost, and Guaranteed Replacement Cost

Actual Cash Value

Pays to repair or replace your home minus depreciation. For example, a 10-year-old roof may only be reimbursed at half its original cost.

Replacement Cost

Covers rebuilding costs without depreciation. Most insurers require coverage of at least 80% of your home’s replacement value. Falling below this threshold can result in partial payouts:

Example: If your home’s replacement cost is $300,000 and you insure it for $200,000 (67% coverage), a $150,000 fire loss would only yield a $100,000 payout. An inflation-guard rider can automatically adjust coverage limits.

Guaranteed Replacement Cost

Pays to rebuild your home even if costs exceed policy limits. This option is pricier and may not be available for older homes or in high-risk areas. As an alternative, extended replacement cost policies cover up to 20-25% above your policy limit.

Additional Considerations

• Building code upgrades require a separate rider—standard policies won’t cover these costs.
• Detached structures (e.g., garages, sheds) need separate coverage, typically 10% of your main dwelling’s insured value.

Final note: Regularly review your policy to ensure adequate coverage as construction costs and home values fluctuate.