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USDA Loans and Homeowners Insurance

Homeowners insurance is a way to protect your investment in your USDA-guaranteed home from fires, natural disasters, accidents, theft, and other kinds of damage. It’s one of the most basic ways to safeguard your home from natural and man-made disasters.

It’s also something USDA lenders will require. Homeowners insurance protects their collateral, which buyers don’t fully own until the loan is repaid in full.

But homeowners insurance isn’t just a good idea because it’s required. A home is probably the biggest purchase you’ll ever make, and it just makes good sense to insure yourself against losses.

There are lots of different kinds of insurance, but the two main kinds that USDA borrowers encounter are homeowners (sometimes called “hazard”) insurance and flood insurance.

Let’s take a look at what those cover.

Hazard or Homeowners Insurance

This is the basic type of insurance almost any lender, including ones backed by the USDA, will require you to have before you can close.

You’ll have to prove you have a policy that you’ve pre-paid for the first year. There’s a range of types 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 given your specific situation.

Homeowners insurance can cover things like:

  • Fire
  • Lightning
  • Hail
  • Windstorm
  • Theft
  • Vandalism
  • Damage from vehicles and aircraft
  • Riots and civil commotion
  • Volcanic eruption
  • Glass breakage

Basic hazard insurance will not cover floods or earthquakes. If you live in a flood or earthquake-prone area, you may need to take out a separate policy to protect against those disasters.

USDA Loans and Flood Insurance

Most standard home insurance policies don’t cover flooding. Flood insurance can be worth considering regardless of where you’re buying – more than 20 percent of claims come from properties outside high risk flood zones, according to the National Flood Insurance Program.

But if you’re buying a home located in a Special Flood Hazard Area, you’ll be required to get flood insurance before you can get a USDA loan. Lenders will obtain a flood certification to determine whether or not flood insurance will be required.

You may be able to purchase flood insurance through the NFIP or from private insurers. Generally, buyers will want a policy that covers both the home and their belongings in case of a flood.

Talk with a USDA loan specialist if you have questions about purchasing a home that needs a flood insurance policy.

Other Common Types of Insurance on USDA Approved Homes

In addition to basic hazard insurance and flood or earthquake insurance, there are a few other standard types of insurance you should be aware of.

Builder’s Risk Policies. If you are building a new home or doing renovation on a home using a USDA loan, you will be required to take out a builder’s risk policy. It’s essentially a home insurance policy that covers the home while it’s being built. To be acceptable, the policy has to name you as the insured, or be a builder’s risk endorsement to a policy that names you. A contractor’s policy won’t cut it.

H-02 Policies. H-02, or “broad form” hazard insurance, is kind of an upgrade from basic H-01 policies. They cover everything an H-01 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 a “special form” home insurance policy, is another step up from H-02. With H-03 policies, instead of naming all the things that are covered, it covers everything except floods and earthquakes. It covers your home, attached structures, the contents of the home, and personal liability. That means it’s the most comprehensive of the three.

H-04 Policies. These are sometimes called renter’s insurance policies, and are only for people who don’t own their own homes. It covers damage and theft to their belongings, but nothing else, since that’s the landlord’s problem.

H-05 Policies. This is the highest tier of homeowners insurance policies. It covers both the property and the stuff inside for anything except hazards specifically named in the policy. They are the most expensive, and most comprehensive, homeowners insurance policies.

H-06 Policies. These kinds of policies are typically for buyers purchasing a condo unit and cover the interior of the dwelling along with the borrower’s personal property. Condo associations and developments will usually have a master insurance policy that covers common areas used by all condo dwellers.

Paying Homeowers and Flood Insurance Premiums

For a USDA loan, you have to have homeowners insurance coverage for the amount of the loan or the what it would cost to completely replace your house if it was destroyed.

Keep in mind that the replacement cost is different than the amount that your property is worth. Generally, the replacement cost will be included in your appraisal alongside the appraised value, and your insurance provider will come up with their own estimate based on the specifics of your home.

A lot of factors go into determining what your premiums will be, including where you live, what insurance company you’re using, what kind of coverage you get, your history of making insurance claims, what your house is made of, and how much it would cost to replace your home.

You’ll also need to decide what kind of deductible amount makes sense. Higher deductibles tend to mean lower annual premiums, but that also means more money out of pocket before the insurer chips in if you file a claim.

At closing, you will pay the entire first year’s premiums as part of your closing costs. Buyers can ask sellers to cover this cost as part of their negotiations regarding closing costs and concessions.

After that, you’ll typically pay a portion of this annual bill each month as part of your regular mortgage payment. Lenders will escrow these funds and pay the premium for you when it’s due. They’ll typically do the same thing with your annual property tax bill.

That’s why you’ll often see a mortgage payment expressed as PITI, which stands for principal, interest, taxes and insurance. Those four elements make up the monthly payment for most USDA buyers.

How to Receive Compensation for Losses

If something happens to your home and you need to make an insurance claim, you’ll be responsible for filing 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 is made, it’s your responsibility to pay your deductible and negotiate with your insurance company if you feel like you’ve been unfairly compensated.

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