In short
If a conventional lender will sell your loan to Fannie Mae, your policy must cover fire, windstorm, hail and five other perils on a replacement-cost basis, and the deductible may not exceed 5% of the coverage amount (Fannie Mae Selling Guide B7-3-02, updated August 5, 2026). On $400,000 of coverage, that is a $20,000 ceiling. Most policies do not cover flood (FEMA).
What does a lender require?
No federal law tells you how much homeowners insurance to buy. The requirement comes from your lender and from the investor that will buy the loan. Fannie Mae is the one we can read, and its rules are a good picture of what a conventional lender asks for. FHA, VA and USDA lenders set their own conditions, so ask yours for its list in writing.
Under the Selling Guide for one- to four-unit homes:
- Form. The policy should be written on a “Special” coverage form or equivalent.
- Perils. At a minimum: fire or lightning, explosion, windstorm (including named storms), hail, smoke, aircraft, vehicles, and riot or civil commotion. If the policy excludes or limits one of them, you must buy separate coverage for it.
- Amount. Coverage must be on a replacement-cost basis, except for the roof. A roof must be insured but does not need replacement-cost coverage.
- Deductible. The maximum is 5% of the coverage amount for every required peril. If the policy has a separate wind or wildfire deductible, that one is also capped at 5%.
- Insurer strength. The company needs one of these ratings: AM Best “B” or better, Demotech “A” or better, Kroll “BBB” or better, or S&P Global “BBB” or better.
- Your choice of insurer. You pick the insurer, as long as the policy meets the rules.
How is the coverage amount judged?
For a one- to four-unit home, Fannie Mae looks at the policy’s loss settlement terms rather than a fixed dollar figure: replacement cost, not actual cash value, is what makes the coverage sufficient for the house itself. The guide notes that actual cash value is acceptable for personal property and for structures that are not buildings. Before you buy, ask the agent in writing how the policy settles a loss on the dwelling and on the roof.
What it costs, and who sets the price
No federal agency sets homeowners premiums, and no official source gives a typical national price. Compare quotes for the same coverage amount and the same deductible, not just the same premium.
Here is how the 5% cap works in practice.
| Coverage amount | Highest deductible allowed (5%) | Percentage deductible you might be offered |
|---|---|---|
| $300,000 | $15,000 | 1% = $3,000 |
| $400,000 | $20,000 | 2% = $8,000 |
| $500,000 | $25,000 | 5% = $25,000 |
The right-hand column is an illustration, not a quote. Whatever deductible you choose, you must be able to pay it after a loss.
What is not covered?
A standard homeowners policy covers the perils the policy names, and flood is not among the ones lenders require. FEMA states that “most homeowners insurance does not cover flood damage” and that flood insurance is a separate policy. See flood insurance and the NFIP.
If the home is in a Special Flood Hazard Area, federal law bars regulated lenders from making, increasing, extending or renewing the loan unless flood coverage is in place (42 U.S.C. 4012a(b)). Fannie Mae adds that zones beginning with “A” or “V” are Special Flood Hazard Areas.
How is it paid at closing and after?
Insurance is usually paid through an escrow account. The CFPB notes that many lenders require escrow for taxes and insurance “so they can make sure that the bill gets paid,” and that your servicer pays the bills on your behalf. Closing-day insurance charges and escrow deposits appear on your Loan Estimate and Closing Disclosure; see closing costs explained.
If the policy lapses, the lender may buy a policy for you and bill you. The CFPB calls this force-placed insurance and says it “is typically more expensive than homeowners insurance you pay on your own.” Keep the lender informed when you change insurers.
Where states differ
Insurance is regulated mainly at the state level, so policy forms, deductibles for wind, hail or wildfire, and which insurers sell in your area depend on where you buy. Your state insurance department can answer questions about a specific policy. For two examples with state detail, see Texas natural hazards and insurance and California natural hazards and insurance.
Frequently asked questions
How much homeowners insurance does my lender require?
The lender sets it. For loans sold to Fannie Mae, the policy must be on a replacement-cost basis (the roof excepted) and carry a deductible of no more than 5% of the coverage amount. FHA, VA and USDA lenders have their own conditions.
Does homeowners insurance cover floods?
Usually not. FEMA says most homeowners insurance does not cover flood damage, and flood insurance is a separate policy. In a high-risk flood area with a federally regulated lender, you must buy it.
Can I choose my own insurer?
Yes. Fannie Mae’s guide says the borrower has the right to select the insurer, provided the policy meets the guide’s requirements, including the insurer ratings listed above.
What happens if I let the policy lapse?
The lender can buy force-placed insurance and charge you. The CFPB says it is typically more expensive than a policy you buy yourself, so replace the coverage quickly.
Is homeowners insurance paid through escrow?
Often. Many lenders require taxes and insurance to be paid through escrow. Your servicer collects part of the premium each month and pays the bill.
More owning guides
Sources
- B7-3-01, General Property Insurance Requirements for All Property Types (Fannie Mae Selling Guide) (consulted October 13, 2026)
- B7-3-02, Property Insurance Requirements for One- to Four-Unit Properties, 08/05/2026 (Fannie Mae Selling Guide) (consulted October 13, 2026)
- B7-3-06, Flood Insurance Requirements for All Property Types (Fannie Mae Selling Guide) (consulted October 13, 2026)
- What is an escrow or impound account? (Consumer Financial Protection Bureau) (consulted October 13, 2026)
- Flood Insurance (FEMA) (consulted October 13, 2026)
- 42 U.S.C. 4012a, Flood insurance purchase and compliance requirements (Cornell LII) (consulted October 13, 2026)