USDA Loans and Homeowners Insurance
When you purchase and own a USDA-guaranteed home, a homeowners policy can safeguard your investment from risks like fires, storms, natural disasters, theft, accidents, and other kinds of damage.
Getting homeowners coverage isn’t optional; your USDA lender will require it. This policy will protect your lender’s collateral until you completely repay the loan. A home is probably the biggest purchase you’ll ever make, and it makes good financial sense to insure yourself against losses.
Eager to learn about USDA homeowners insurance requirements, how these policies work, what you can expect to pay, and how to pick the right carrier and coverage for your needs? Read on to learn more.
A homeowners insurance policy is essentially a binding legal contract that shields you, the homeowner, from financial loss caused by damage to your property and personal belongings, liability due to injury, and property damages to others. You, the policyholder, agree to pay your chosen insurance company a premium monthly, annually, or at other intervals in exchange for the coverages you select ahead of time. You also choose a deductible amount — this is the out-of-pocket cost you will pay before the insurance policy kicks in to cover any claim.
“For example, let’s say you had $10,000 worth of damage to your home due to a covered claim like a fire. If you agree ahead of time to a $1,000 deductible, you would pay that $1,000 upfront and your insurer would pay the remaining $9,000,” explains Lauren McKenzie, insurance agent with A Plus Insurance.
Steven Glick, director of mortgage sales for HomeAbroad, calls homeowners insurance a safety net for your biggest investment — your home. “If something goes wrong, you can file a claim to get money to repair or replace what’s been damaged, minus your deductible,” he says.
This contract is called a “policy” because it serves as a formal document or agreement that specifies the conditions, terms, and provisions of the insurance coverage. Your policy will spell out your deductibles, exclusions, responsibilities, coverage limits (more on this later), and what the carrier requires.
Bear in mind that homeowners insurance is different from other types of home-related insurance, including title insurance and mortgage insurance. While your lender will require that you have title insurance, USDA mortgage insurance is not required, even if you make no down payment.
No lender will approve a mortgage loan without proof of homeowners insurance.
“In the event of catastrophic damage, the lender needs to ensure that their collateral is protected,” says Matt Schwartz, founding partner of VA Loan Network and a lending professional with Southlake Loans, which offers USDA financing.
Note that most USDA lenders will require you to purchase an insurance policy based on the replacement cost value of your home. Replacement cost ensures that your home is rebuilt or repaired based on current market prices, without depreciation factored in. Replacement cost differs from actual cash value (ACV), which only pays to repair or replace damaged property, minus any depreciation.
“As for minimum coverage, USDA loans typically require enough coverage in place to safeguard either the loan amount or the cost to fully rebuild your home, whichever is higher,” notes Glick. “That rebuild cost, called replacement cost, is what matters most. It’s not about the market value of your home but what it would take to reconstruct it from scratch. Your lender will check this during the home appraisal to make sure you have a policy that’s up to snuff.”
Heads up: You’ll also have to prove that your policy has been prepaid for the first year.
You can choose from a range of homeowners insurance policies and coverages. Lenders may have their own requirements for coverage, so talk with your loan officer about what you’ll need for your specific situation.
Let’s take a closer look at the different types of perils a standard homeowners insurance policy (also called an HO-1) covers. They include:
Be aware that a standard HO-1 insurance policy will not cover earthquakes or floods. If you live in a flood or earthquake-prone area, you may need to take out a separate policy to protect against those disasters.
Within policies, coverages are broken up into different categories. These include:
In addition to a basic hazard policy, it’s important to note a few other types of insurance.
| Insurance Type | Description |
|---|---|
| Builder’s Risk Policies | If you’re building a new home or renovating a home using a USDA loan, you must take out a builder’s risk policy, which is a home insurance policy that covers the home while it’s being built. The policy must name you as the insured or be on a builder’s risk policy that names you. A contractor’s policy won’t cut it. |
| H-02 Policies | H-O2, or “broad form” hazard insurance, is a slight upgrade from a basic H-O1 policy. It covers everything an H-O1 policy covers, as well as falling objects, the weight of ice or snow, and malfunctioning electrical or other household equipment. |
| H-03 Policies | Also known as a “special form” home insurance policy, an HO-3 policy is another step up from an H-O2 policy. Instead of naming all covered items, an H-O3 covers everything except floods and earthquakes. It protects your home, attached structures, the contents of the home, and personal liability. It’s more comprehensive than HO-1 and HO-2 policies. |
| H-04 Policies | H-O4 policies are sometimes called renter’s insurance policies and are only for people who don’t own their own homes. They cover damage and theft to belongings — all other coverage responsibility rests with the landlord. |
| H-05 Policies | This is the highest homeowners insurance policy tier. It covers both property and belongings except hazards specifically named in the policy. These are the most expensive, comprehensive homeowners insurance policies. |
| H-06 Policies | These policies are typically for buyers purchasing a condo unit. They cover the dwelling’s interior and the borrower’s personal property. Condo associations and developments usually have a master insurance policy that covers common areas used by all condo dwellers. |
| Flood Insurance Policies | Flood insurance policies protect covered homes from flood damage, which is not typically covered on a standard HO-1 insurance policy. Flood insurance may be required if your home resides in a high-risk flood zone. |
| Earthquake Insurance Policies | Optional earthquake policies cover damage caused to residences by earth movement (earthquakes and tremors), which is not included in a standard (HO-1) insurance policy. |
You’ll need to be aware of coverage limits with any type of homeowners insurance policy. The coverage limits in your policy represent the maximum amount your carrier will pay for covered claims. These ceilings are commonly outlined on your policy’s declarations page and apply to the types of coverage outlined above (like dwelling, personal property, and liability). If a claim surpasses the predetermined ceiling, you’re on the hook for paying the out-of-pocket difference. When you first purchase your policy, you usually have the option to pick these limits yourself. It’s important to choose limits that adequately protect your assets and interests. The higher your limit, the more you’ll pay for your premium (but you’ll have greater peace of mind knowing you’re covered if costly, extreme circumstances occur).
To decide on appropriate coverage, consider factors like the value of your home and belongings, your exposure to liability, and your comfort with risk. Your insurance agent can help you determine ideal coverage limits for your needs and budget.
According to NerdWallet, the average cost of homeowners insurance in 2025 is approximately $2,110 annually for $300,000 of dwelling coverage.
McKenzie can vouch for that figure.
“Premiums can vary based on the location of the home, the amount of insurance or value of the home, and other personal factors,” McKenzie says.
Other factors can determine your premium, including the insurance company you choose, your history of filing insurance claims, and the materials used to construct your home.
Your out-of-pocket costs will also depend on your chosen deductible. Again, higher deductibles tend to result in lower annual premiums, but that also means if you file a claim, you’ll pay more money out of pocket before the insurer chips in.
When you close on your USDA home, you’ll pay the entire first year’s premiums as part of your closing costs. You can ask the home seller to cover this cost as part of your closing costs negotiations and concessions.
After that, you’ll typically pay a portion of this annual bill each month as part of your regular principal, interest, taxes, and insurance (PITI) payment if you choose to escrow your housing funds. If you escrow, your USDA lender will collect and hold the money for you and pay the insurance premium on your behalf when due. They’ll typically do the same thing with your annual property tax bill.
“With USDA loans, the lender typically sets up an escrow account,” says Dennis Shirshikov, a professor of economics and finance at City University of New York/Queens College. “This is a convenient way to simplify budgeting and ensure you have no gap in coverage. It also secures the lender’s investment by minimizing the risk of foreclosure from unpaid premiums.”
McKenzie recommends researching several companies and carefully checking their reviews and ratings. “Take a close look at their J.D. Power or AM Best ratings, which show the company’s strengths, financial security, customer service reputation, claims rating, and many more important factors,” she suggests.
The key to getting a good deal on USDA homeowners insurance is to shop around among several carriers and compare rates, terms, exclusions, deductibles, and coverage levels.
“Compare coverages, not just price. Cheap policies might skimp on protection,” cautions Glick.
The least expensive isn’t necessarily the best option, agrees McKenzie. “Sometimes paying a slightly higher premium to a higher-rated company can save you money and hassle in the long run,” she says.
Don’t forget to inquire about discounts. These can include discounts for bundling homeowners and auto policies, being claims-free, installing fire and smoke alarms, and implementing a security system.
If something happens to your home and you need to make an insurance claim, you’ll file the claim with your insurance company. The next steps will vary by insurance company, but generally, you’ll let them know what happened, and they’ll send out an adjuster to determine whether you’re covered, and for how much.
After that determination, it’s your responsibility to pay your deductible and negotiate with your insurance company if you feel you’ve been unfairly compensated.
What Kind of Homeowners Insurance is Required for USDA Loans?
Your USDA loan and lender require you to have a standard homeowners insurance policy, prepaid for one year. Additionally, the coverage provided by your policy must be equal to or greater than the loan amount or the cost to fully replace the residence. Also, the name listed on your policy must exactly match the name on your USDA loan.
Is Homeowners Insurance Included in My Monthly Mortgage?
Your insurance premium is different and separate from the monthly mortgage amount you pay to your lender. However, if you choose to set up an escrow account wherein your USDA lender collects funds ahead of time, your lender will automatically pay your premium on your behalf. In this case, your lender will take your annual premium, divide it by 12 months, and add that monthly cost to your total monthly housing payment (including principal, interest, insurance, and taxes).
Can I Choose My Own Insurance Provider?
Yes, you can select your own homeowners insurance provider as long as the company complies with USDA loan standards and the policy offers sufficient property coverage
What Happens if I Don’t Have Coverage at Closing?
Without proof of a sufficient prepaid homeowners insurance policy, your lender will not allow your loan to close. Your closing will be delayed until you attain proper coverage. In some cases, the lender could deny your loan entirely.
