Qualifying
What is homeowners insurance?
Homeowners insurance is a policy that protects your home, personal belongings, and liability exposure. Most mortgage lenders require it. A standard policy covers damage from fire, wind, theft, and similar perils — but typically excludes floods and earthquakes.
The full picture
Homeowners insurance (also called hazard insurance) is a contract between you and an insurance company: you pay a premium; if a covered event damages your home or property, the insurer pays the repair or replacement cost (subject to your deductible and coverage limits). Unlike health or auto insurance, homeowners insurance is not legally mandated — but virtually all mortgage lenders require it as a condition of the loan. The CFPB explains your lender's role in requiring and monitoring coverage.
What a standard policy covers
A standard policy (the most common form) provides four types of protection: dwelling coverage (the structure itself); other structures (detached garage, fence); personal property (furniture, electronics, clothing); and liability (if someone is injured on your property and sues you). Most policies also include additional living expenses (ALE) — hotel and meal costs if your home becomes uninhabitable during a covered repair.
- Covered perils typically include: fire, lightning, windstorm, hail, explosion, theft, vandalism, and water damage from a burst pipe.
- Standard policies do NOT cover flood damage — a separate National Flood Insurance Program (NFIP) policy is required.
- Standard policies do NOT cover earthquake damage — a separate rider or policy is required in high-risk areas.
- Your deductible is the amount you pay out of pocket before insurance covers the rest.
- Replacement cost coverage rebuilds at today's construction prices; actual cash value (ACV) deducts depreciation.
How premiums are set
Premiums are calculated by your insurer based on your home's location, age, construction materials, replacement cost, your claims history, and (in most states) your credit-based insurance score. Raising your deductible, bundling with auto insurance, and installing safety features (alarm systems, updated wiring) commonly reduce premiums. The CFPB's homeowners insurance overview explains how coverage interacts with your mortgage.
Force-placed insurance: the cost of letting coverage lapse
If you let your homeowners insurance lapse on a mortgaged property, your lender is allowed to purchase force-placed insurance (also called lender-placed insurance) on your behalf and add the premium to your mortgage balance. Force-placed policies are typically more expensive than market-rate coverage and protect the lender, not you. CFPB rules require lenders to notify you before placing force coverage and to cancel it once you restore your own policy.
What regulators say about homeowners insurance
- Mortgage lenders can require borrowers to maintain hazard insurance covering at least the outstanding loan balance or the replacement cost of the insured structure. — CFPB
- Standard homeowners insurance policies do not cover flood damage; separate flood insurance is available through FEMA's National Flood Insurance Program (NFIP) or private insurers. — FEMA
- Lenders must give advance notice before charging a borrower for force-placed insurance and must terminate it after receiving proof of the borrower's own coverage. — CFPB
Key takeaways
- Homeowners insurance protects your structure, belongings, and liability — lenders require it on mortgaged homes.
- Standard policies cover fire, wind, theft, and burst pipes — not floods or earthquakes.
- Flood insurance is purchased separately through FEMA's NFIP or private carriers.
- Your deductible is what you pay before the insurer covers the rest — higher deductibles mean lower premiums.
- Letting coverage lapse allows your lender to buy force-placed insurance at your expense.
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Published 2026-05-22 · Updated 2026-05-22 · https://clearvaluelending.com/answers/what-is-homeowners-insurance