Every homeowner is required to carry home insurance, even if your home has been paid off in full. It protects your investment and protects you with liability coverage in the event of a lawsuit by a guest in your home.
And if you’re paying off a mortgage, the mortgagee—the bank or institution that owns the loan—will likely require homeowner’s insurance coverage.
If you are looking to buy the best bad credit home owner insurance, you will need to do some research and shopping around. While you are waiting for insurance companies to contact you with quotes, this is the perfect time to check your credit score. This may sound like a lot of work, but it can save you hundreds — maybe thousands — of dollars each year.
Shopping for home owner insurance when you have bad credit
This unbiased article explains everything you need to know about buying home owner insurance with bad credit. We will answer your most frequently asked questions such as:
and more, such as the difference between actual cash value, replacement cost, and extended replacement cost policies.
Do insurance companies consider your credit score when citing home insurance?
Sometimes yes. As of late 2022, seven states allow insurers to consider a consumer’s credit score when creating a risk rating. They are:
- and Oregon
In those states, 85% of home insurance companies will use consumer credit information when calculating risk groups and premiums, and 95% of auto insurance companies do the same, per National Association of Insurance Commissioners (NAIC).
So, if you live in one of those states, you can be confident that your credit history affects your price for all types of insurance.
If you live in any of the other 43 states, don’t worry. Insurance companies are not allowed to look at your credit history when determining your premium.
How do insurance companies know your credit score?
Three major institutions in the United States monitor consumer credit. They report their findings to financial institutions, creditors and insurance companies. They are:
Any insurance company can contract with any of these bureaus to learn about your credit history. But know that insurance companies also keep accurate records about consumer behavior, claims, rates, and risks. They share these databases with each other. So if an insurance company knows you have poor credit, they probably all know.
If you’re looking to save money on homeowner’s or auto insurance, and you live in one of the states listed above, you should check your credit rating and take a proactive approach to fixing any problems. Pay bills on time, pay off your debts as much as possible, and make sure no one steals your identity and creates unpaid debts.
You will probably need to deal with some collection agencies to improve your credit.
How do collection agencies work?
Collection agencies buy debts for a fraction of the amount owed, and then try to collect more money than you spent. Therefore, you can try to settle larger and older debts by contacting a collection agency or credit bureau that reports this. For example, if you owe a medical bill of $500 three years ago, you can call them and ask that they accept a smaller amount, say $300.
Just know that any information you choose to give them—such as an updated email address or mobile phone number—could be used by them to try to collect a debt.
Collection agencies have a reputation for collecting debts and then forgetting to notify the credit reporting agencies. This is another reason why it is so important to stay on top of your credit report.
Now you’re thinking, “I know all this. I’m working on paying down my debt, but I still need a great deal of homeowner’s insurance for people with bad credit. What next?”
Let’s explore some tips for shopping for home owner insurance with bad credit.
How to find the best homeowner’s insurance when you have poor credit
To find the best homeowner insurance with bad credit, learn how much coverage you need and what type of coverage you hope to purchase.
Determine the “best” homeowner’s insurance policy for individuals with bad credit
First, let’s consider how to determine the “best” property insurance. Price is always the main consideration, especially if you’re struggling financially at the moment, so keep your budget in mind.
Next, consider other points of interest for a homeowner’s insurance policy, such as:
- The total amount of coverage you need, usually called Coverage A
- Contents coverage, which is a set percentage of coverage A, and pays out to your property after a covered loss
- Liability coverage, which protects the homeowner in the event of being sued by a guest
- and specific coverage of specialty items such as artwork, musical equipment, or jewelry
Another key consideration is the difference between replacement cost (RC) coverage, extended replacement cost (ERC) coverage, and actual cash value (ACV) coverage in a policy.
RC, ERC, and ACV explained
Regardless of your credit standing, all homeowner insurance policies in the United States are built on the idea of fire coverage. In other words, if your insured home burns down, you — or the mortgagee who has a mortgage — can collect the money and become whole after the financial loss.
Outside of the structure itself, HO policies save more money for things like other structures (OS), covering the contents, and removing debris. A $100,000 insured home that burns down might be netting a $175,000 check!
But often, homes don’t burn completely. In insurance talk, we call this a partial loss. For example, imagine a kitchen fire in your home right now. Call 911, the fire department comes quickly, and they are able to save most of the house. The insurance adjuster calculates depreciation for your belongings, and says destroyed cabinets, appliances, floors, and ceiling are worth $40,000 in damage.
replacement cost policies
If you have a replacement cost policy, the insurance company will pay $40,000 to repair and replace everything, deducted from your deductible. Some homeowners find this to be a frustrating point if labor and material costs are higher than normal. For example, cabinets you paid $15,000 for in 2001 may cost $30,000 to replace today. Flooring, roofing, and labor cost more these days, so a homeowner may have to repair their home with lesser-quality materials.
Extended replacement cost policies
With an extended replacement cost policy, the insurer will pay more after the covered loss. Sometimes this amount is a set percentage, such as 10% or 20% more than the agreed-upon coverage amount. Other times, an RCV policy will pay to replace your belongings outright, regardless of the price.
If you have expensive marble floors, custom cabinets, or other quality materials in your home, you will be best protected by an ERC policy.
actual cash value policies
Effective cash value policies pay the lowest amount on a claim like this. In these cases, the depreciated value is the most important. Therefore, your 20-year-old tanks may only be worth $2,000. The homeowner will need to find replacement cabinets at this price.
RC and ERC policies have become the standard for a homeowner in the United States, and when you call an agent to talk about homeowner’s insurance for someone with bad credit, they’ll usually offer you an RC or ERC policy.
However, if you are struggling financially, you can ask about an ACV policy, assuming your mortgagee allows it.
Are your ACV business owner’s insurance policies out of date?
Some dealerships feel that owner’s ACV insurance policies are outdated, given the supply chain struggles and increased labor cost we’ve seen in the past few years. But it’s still available, and always more affordable.
As a consumer, you should be aware of the difference. Ask your agent to explain to you what kind of coverage they offer, and how much they will charge to replace your belongings after a partial loss. Low monthly payments may be attractive, but you may be left stranded after a partial loss like the kitchen fire we described above.
Coverage A: Home Valuations Explained
Sometimes people shopping for home owner insurance with bad credit try to insure their homes for a lower overall value.
Imagine, for example, an older couple who paid $65,000 for their house in 1975. They take great care of the house and the neighborhood has a lot of new housing. When shopping for insurance, the agents value their home at $200,000. The couple is confused and anxious, as they don’t think their home is worth that much.
Understand that Coverage A, the appraisal on your home, describes the cost of building a brand new home if your home were to burn down.
Insurance agents use a formula to create an estimated replacement cost for your home. This formula takes into account many factors, such as:
- square footage
- Building materials
- HVAC systems
- roof type
- your location
- And the cost of rebuilding other homes in your area after the claim
Thinking of the older couple in our example, they might be happy with a policy that values their home at $100,000. They feel they will live well in an apartment on that money if the house burns down. The insurance company may agree to this assessment.
How to save money on homeowner’s insurance with bad credit
For homeowners with bad credit, there are other ways to save a few bucks on your insurance. First, consider increasing your deductibles.
Consider the deductible amount
Discount It is the amount the homeowner will pay to repair the home after a covered loss. If your kitchen burns down and you have a $1,000 deductible, the insurance company will expect you to pay the first $1,000 of any repairs.
You can save big on your monthly payments by increasing your deductible from $1,000 or $2,500 to $5,000 or more. Of course, your mortgagee may request a specific deduction, so follow their rules. And many people don’t always have $5,000 in cash or a credit to pay for repairs, so this isn’t always a great angle.
Shop around for homeowner’s insurance every few years
Insurance companies tend to raise their rates slowly over time. If you have been with the same insurance company for many years, get some quotes from others. They may offer you a very competitive rate to get your business.
Ask about discounts
Property insurance companies have aggressively marketed deductibles in recent years. So call your insurance company and ask what deductibles might apply to your family.
You may pay a lower premium for:
- No claims history
- Professional certifications
- Upgrades to your home such as security systems, a new roof, or new plumbing
“Bundling” your insurance products
If you have several lines of insurance, such as life insurance, motorcycle insurance, and auto insurance, you can save on your homeowner’s policy by using one company for all of those lines. It’s called “bundling” and you’ve probably seen a Progressive ad about it.
In addition to the price, there are some additional benefits to bundling. Some consumers like to deal with a single agent or pay bills using only one website.
However, there are some caveats to consider when bundling insurance products to get a better rate for homeowner insurance with bad credit. When all your policies are with one company, it can be a real problem if you want to change. And if your rates on one policy go up—if your car insurance increases after an accident, for example—you’ll lose the deductible on your homeowner’s policy if you transfer your auto insurance to a new provider.
Ultimately, if you are in one of the states that allow insurance companies to look at your credit rating, the best thing you can do is shop regularly and stay on top of your credit as much as possible. Once your score improves, shop again.