The Homeowners Insurance Gap Lenders Won’t Warn You About
Last updated 11/03/2026 by
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Edited by
Andrew Latham
Sponsored by Farmers Insurance®. This article was provided by Farmers and reviewed by SuperMoney’s editorial team for accuracy. SuperMoney may receive compensation from Farmers when you request a quote through our site.
Summary:
You may think your homeowners insurance has you covered. Here’s why it might not. If you bought only the amount of coverage your lender required, which is enough to protect the loan, you could be underinsured. Your mortgage balance and your home’s rebuilding cost are two different numbers, and rising construction costs can widen the gap. Here’s how to check whether you’re fully covered.
When you buy a home with a mortgage, your lender requires homeowners insurance to cover its stake in your home. But meeting your lender’s insurance requirement can still leave you short of the coverage you’d need to rebuild your home after a total loss.
Lender requirements also don’t include the coverage you need for your belongings, liability, or added living expenses if a covered loss forces you out of your home.
In short: your mortgage balance and your rebuilding cost are two different numbers. If your coverage doesn’t reflect the cost of rebuilding, you could face a costly gap between what your insurance pays and what you pay out of pocket after a total loss.
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What your lender’s minimum coverage protects
Your lender’s requirement, often called hazard insurance in loan documents, may cover only your home’s structure, which insurers call dwelling coverage. It may not cover:
- Your belongings. Electronics, appliances, jewelry, furniture, even your prized sneaker collection: anything inside the house that isn’t the structure itself. This falls under personal property coverage, not dwelling coverage.
- Your liability. If someone’s hurt on your property, or you damage someone else’s, liability coverage can protect you financially.
- Costs if you have to move out during repairs. Additional living expenses (loss of use) coverage helps pay for a hotel or rental while your home is unlivable.
Why rebuilding costs can exceed your mortgage balance
Rebuilding costs can change a lot over time. Prices for the materials that go into building a home rose about 71% over the past decade, according to the U.S. Bureau of Labor Statistics’ producer price index for inputs to residential construction, which tracks what builders pay for goods like lumber, concrete and roofing. Labor costs come on top of that. Regional labor shortages, tariffs on materials, and local permitting or building-code requirements can push costs even higher.
Your dwelling coverage should reflect what it would actually cost to rebuild at today’s labor and material prices, not what you paid for the home or how much you still owe on your mortgage.
Here’s what that could look like in real numbers (a hypothetical example):
| Item | Amount |
|---|---|
| Your home purchase price 10 years ago | $300,000 |
| Your dwelling coverage, based on your lender’s requirement | $250,000 |
| Cost to rebuild today | $410,000 |
| Your insurance gap (rebuild costs you could pay out of pocket) | $160,000 |
Remember, that gap doesn’t include your belongings or liability.
This isn’t only a problem for a home you bought a while back. It could be true of the home you buy today if the lender’s required coverage is tied to your loan amount, especially if you make a large down payment. It’s up to you to make sure you’re covering the cost of rebuilding, both when you buy and over time.
The risk of insuring to the mortgage, not the home
“My coverage matches my loan amount” may sound reasonable. But your mortgage balance and your home’s rebuilding cost can move in very different directions. If you base your coverage on what you owe rather than what it would cost to rebuild, you could end up with a significant gap.
A coverage gap becomes painfully clear after a total loss. A study of homeowners who filed claims after Colorado’s 2021 Marshall Fire found that 74% were underinsured, and 36% had dwelling coverage below three-quarters of their rebuild cost. The researchers, from the University of Colorado Boulder and the University of Wisconsin-Madison, found that many homeowners rely on the coverage amount suggested when they buy a policy rather than checking rebuild costs on their own.
After a total loss, the amount your policy pays toward rebuilding generally depends on your coverage limits and policy terms. If rebuilding costs more than the coverage available under your policy, you may have to cover the difference yourself.
Underinsuring your home can also affect a partial-loss claim. Some policies include an insurance-to-value or coinsurance requirement: if your dwelling coverage falls below a set percentage of your rebuild cost (commonly 80%), your insurer may reduce your payout proportionally, even on a loss that’s far below your limit.
How to calculate the coverage you actually need
“Start by estimating what it would cost to rebuild your home today,” said Greg Pannhausen, head of property product development for Farmers Insurance®.
Your insurer or agent can help estimate rebuilding costs, and a local contractor or appraiser can add another perspective. Estimates factor in your home’s square footage, age and construction type, upgrades (such as a renovated kitchen, finished basement or addition), local labor and material costs, and current building code requirements.
Check periodically that your coverage is keeping pace with building costs. “A replacement cost estimate isn’t a set-it-and-forget-it number. A major renovation, higher construction costs or a surge in rebuilding after a local disaster can change the math,” Pannhausen cautioned.
While you’re reviewing dwelling coverage, check the rest of the policy too. The Insurance Information Institute, an industry research group, notes that personal property coverage is generally 50% to 70% of your dwelling limit. On many policies, loss-of-use coverage is also set as a percentage of the dwelling limit. So if your dwelling limit is too low, those coverages can shrink right along with it.
Liability coverage isn’t tied to your dwelling limit, but it deserves scrutiny too. Liability limits generally start at about $100,000, according to the Insurance Information Institute. A common rule of thumb is to carry enough liability coverage to protect your net worth. If you’re not sure what that number is, the SuperMoney app can track your net worth across your linked accounts.
Talk to your insurer before you assume you’re covered
Cheaper isn’t automatically better when it comes to homeowners insurance. A low quote may be built around a lower coverage limit than you’d need after a total loss.
“When you compare home insurance, make sure you’re comparing more than price. Ask how the rebuilding estimate was calculated, what your limits are and what the policy would, and wouldn’t, cover after a major loss,” Pannhausen said.
Your insurer’s track record matters, too, when what you’re insuring is the roof over your head. Farmers®, which has been insuring homes for almost a century, offers a free Farmers Coverage Review℠ of your existing policy, even if it isn’t a Farmers policy. Wherever you’re insured, the important question is the same: does your coverage still reflect what it could cost to rebuild your home today?
Coverages are subject to policy terms, conditions, limitations, exclusions and underwriting. Not all products, coverages and discounts are available in every state.
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