USDA Loan Homeowners Insurance Guide

While USDA loans do not require traditional private mortgage insurance (PMI), they still require homeowners insurance and flood insurance, depending on where you live. These policies help protect the property from adverse weather and unexpected damage.

Let’s review the insurance required to close on a USDA loan.

How Much Does Homeowners Insurance Cost?

Homeowners insurance costs vary by state, insurer, and coverage level, but many U.S. homeowners now pay about $1,500 to $2,400 per year for a $200,000 home, based on current national averages. Premiums are often paid monthly and may be included in your mortgage payment, which typically works out to around $125 to $200 per month.

How Does Homeowners Insurance Work?

If you’ve ever had renters insurance, homeowners insurance will feel pretty familiar. Both are designed to protect you when something unexpected happens, like a fire, storm, or break-in. The key difference is that renters insurance only covers your belongings, since the building itself is your landlord’s responsibility. Homeowners insurance includes those same protections and also covers the home itself, helping pay for repairs or rebuilding if it’s damaged by a covered event.

USDA Loan Homeowners Insurance Requirements

To meet the home insurance requirements for a USDA loan, here are the criteria you must satisfy:

1. First Year of Homeowners Insurance Due at Closing

At closing, you must have a one-year paid homeowner insurance policy in place so that the home is insured immediately. Borrowers can apply seller concessions and gift funds to cover this cost.

After closing, your monthly mortgage payment will include a portion of your next year’s homeowners insurance payment, which the lender holds in an escrow account. Those monthly escrow payments are to build up money to pay for the following year’s insurance when it renews, and the lender pays the bill for you.

2. Insurance Must Cover the Full Cost to Rebuild the Home

Your homeowners insurance policy must provide enough coverage to pay for the full cost of rebuilding your home if it were completely destroyed, even if that amount is higher than your loan balance or market value. While it is rare, if your coverage amount is lower than the loan amount, your insurance company will typically provide a Replacement Cost Estimator (RCE) to document the home’s insurable replacement value, which lenders can use to confirm the coverage meets requirements.

3. Policy Deductible Can Be No More Than 5% of Dwelling Coverage

The USDA caps deductibles to help ensure homeowners can reasonably afford the out-of-pocket cost after a loss and that the property can be fully repaired, which protects both the homeowner and the USDA’s financial interest in the loan.

A deductible is the amount you pay out of pocket toward a covered claim before your insurance coverage applies. For example, if your homeowners insurance coverage amount is $200,000, a 5% deductible would equal $10,000, meaning you would be responsible for the first $10,000 of a covered loss. In this example, to meet USDA guidelines, your deductible would have to be $10,000 or less.

Here’s what that 5% limit looks like in real numbers:

4. Policy Must Be Present at Closing

To verify your homeowners insurance policy when closing on your USDA loan, you must provide the original policy or a Homeowners Declaration Page and Invoice for the first year. The name and personal information on your USDA loan should match the information on the homeowners insurance policy, so your lender can easily verify your insurance.

Before closing day, you will have to provide proof of homeowners insurance to your lender with a wider variety of documents, including Evidence of Insurance, a Memorandum of Insurance, a Certificate of Insurance, or an insurance binder.

USDA Loan Flood Insurance Requirements

As mentioned earlier, your homeowners insurance does not cover flood damage. To protect yourself from flood-related issues, you need a separate flood insurance policy with your USDA loan.

USDA only requires flood insurance for any property located in a FEMA Special Flood Hazard Area (SFHA). Your lender will complete FEMA Form 086-0-32, or the Standard Flood Hazard Determination Form, on your behalf and notify you if any portion of your property is in an SFHA. 

USDA flood insurance requirements only apply to the home’s primary structure. Detached structures, such as garages or sheds, generally do not require coverage.

For properties located in SFHAs, the USDA requires flood insurance that meets FEMA’s National Flood Insurance Program (NFIP) standards. The amount of coverage needed is based on the lowest of the following three values: 

• The remaining balance of your USDA loan

• the home’s replacement cost, 

• or the maximum coverage limit allowed under the NFIP (currently $250,000)

USDA follows NFIP rules, which cap flood insurance deductibles at $10,000 or less for both buildings and belongings. Because requirements can vary by situation, it’s best to consult your USDA lender to confirm the exact coverage amount needed for your loan.

The Bottom Line

Aside from merely being requirements, homeowners and flood insurance offers significant benefits to you as a homeowner. These policies protect your home and give you peace of mind against unexpected damage. 

Contact a USDA loan specialist at Neighbors Bank if you have any questions about homeownership, flood insurance or would like to start the USDA loan process.