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USDA Loan Homeowners and Flood Insurance Requirements

By Neighbors Bank Team December 22, 2023

One of the key benefits of USDA loans is that they don’t require private mortgage insurance (PMI). However, they do often have criteria for other forms of insurance coverage. Two of the most relevant examples are homeowner’s insurance and flood insurance, both of which have their own sets of requirements to be aware of when pursuing a USDA loan.

What is homeowner’s insurance?

When you secure a USDA loan, you’ll need to have homeowner’s insurance. Sometimes referred to as hazard insurance, homeowner’s insurance serves as a safety net against many unexpected problems in a home, like damage from fire, wind or other weather-related issues. This insurance policy will also protect your USDA lender’s interests by safeguarding collateral.

It’s important to note that your homeowner's insurance policy will not cover some damages, including damage from floods or earthquakes. If you live in an area prone to these events, you’ll want to look for a separate insurance policy specific to your area of concern.

Your individual USDA lender may have additional homeowner’s insurance requirements to consider. Reach out to your lender for more information before obtaining your insurance policy.

Your annual homeowner’s insurance is typically 0.35% of your home’s value, and the cost will usually be included in your monthly USDA loan payment. Visit our USDA Loan Calculator to get an idea of how homeowner’s insurance may impact your monthly mortgage payment based on your unique loan information.

USDA Homeowner’s Insurance Deductible

Your homeowner’s insurance deductible for a USDA loan should be either

  • 1% of your home coverage amount OR
  • $1,000

Your deductible must not exceed the greater of these two values. See the examples below to get an idea of what your USDA homeowners insurance deductible may be:

Example 1: 1% of Coverage

Say your homeowner’s coverage amount is equal to $175,000, so 1% of your coverage amount is $1,750. In this case, your deductible may be up to $1,750 since this value is greater than the alternative $1,000.

Example 2: $1,000

If your homeowner’s insurance coverage amount is $80,000, 1% of your coverage would be equal to $800. In this scenario, your deductible may be up to $1,000, as $1,000 is greater than 1% of your coverage.

Required Homeowner’s Insurance Documents

To verify your homeowner's insurance policy when closing on your USDA loan, you’ll need to provide the original policy or a Homeowner’s Declaration Page and Invoice for the first year.

Before closing day, you’ll be able to offer proof of homeowner’s 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.

For properties that are located in SFHAs and therefore require flood insurance, the flood insurance policy amount must either:

The size of your policy must equal the lesser amount of these two values. Speak with your USDA lender to determine the required amount for your individual circumstances.

USDA Flood Insurance Deductible

Similar to the USDA deductible requirements for homeowner’s insurance, your flood insurance deductible must be less than either 1% of your loan value or $1,000, whichever value is greater.

The Bottom Line

Aside from merely being requirements, homeowner’s and flood insurance offer significant benefits to you as a homeowner. These policies provide protection and peace of mind to protect your property from unexpected damage.

Understanding and complying with the insurance requirements for USDA loans is an important step to ensure a smooth loan approval process. Contact a specialist here at Neighbors Bank if you have any questions about homeowners or flood insurance or are looking to begin the USDA loan process.

Written by:
Neighbors Bank Team
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