Can I choose my own insurance company?

In most cases yes, as long as the policy meets your lender's minimum coverage requirements.

What happens if my homeowners insurance lapses?

If a required policy lapses, the lender may place a more expensive lender-placed policy on the property to keep it insured, which is generally more costly than a policy you select yourself.

Does homeowners insurance cover flood damage?

Typically not. Standard homeowners policies generally exclude flood damage, which is why separate flood insurance may be required in designated flood zones.

Why is my required coverage amount different from my purchase price?

Lenders usually base required dwelling coverage on the estimated cost to rebuild the structure, which does not include land value and can differ from the purchase price.

Can my insurance premium change after closing?

Yes, premiums can change at renewal, which may lead to an adjustment in your escrow payment.

Homeownership

Homeowners Insurance Requirements for a Mortgage

Learn what homeowners insurance coverage lenders typically require, how escrow works, when flood insurance may apply, and dwelling coverage basics.

Updated 2026-08-17| Applies to: Buyers preparing to shop for homeowners insurance ahead of closing and homeowners reviewing their current coverage.

The short answer

Lenders generally require a homeowners insurance policy that covers at least the dwelling for its replacement cost, often collected through your mortgage escrow account. Depending on the property's location, flood insurance may also be required, and coverage amounts are usually based on rebuilding cost rather than market value.

Why do lenders require homeowners insurance?

Because the property is collateral for the loan, lenders want to ensure it is protected against major damage or loss, such as from fire or storms. A lender will generally require proof of an active homeowners insurance policy before closing, and will often require that the policy remain in force for the life of the loan.

What coverage types are typically required or recommended?

Dwelling coverage: pays to rebuild or repair the structure itself.
Liability coverage: protects against certain claims if someone is injured on the property.
Personal property coverage: covers belongings inside the home, though limits and specifics vary by policy.
Loss of use coverage: may help with temporary living expenses if the home becomes uninhabitable after a covered event.

Dwelling coverage vs. market value: what's the difference?

A common point of confusion is that lenders typically require dwelling coverage based on the cost to rebuild the structure, not the property's market value or purchase price. These two numbers can be quite different, since market value includes land value and local market conditions, while rebuilding cost focuses only on construction materials and labor to reconstruct the home. This is why a homeowner might see a required coverage amount that looks different from what they paid for the home.

Concept	What it reflects
Market value	What a buyer might pay for the home and land in the current market
Dwelling/replacement cost coverage	What it would cost to rebuild the structure at current construction costs
Land value	Generally not insurable, since land itself typically isn't destroyed by a covered event

How does escrow work with homeowners insurance?

Similar to property taxes, many lenders collect a portion of your annual homeowners insurance premium each month as part of your mortgage payment, holding it in escrow and paying the insurer when the premium is due. If your premium increases at renewal, your monthly escrow payment may be adjusted accordingly.

When is flood insurance required?

If a property is located in a designated flood zone, lenders are generally required to mandate flood insurance as a condition of the loan, separate from a standard homeowners policy, which typically does not cover flood damage. Flood zone determinations are made during the loan process, and it's worth asking early if a property's flood zone status is unclear, since it can affect your total insurance cost.

What about deductibles?

Your policy's deductible is the amount you would pay out of pocket before insurance coverage applies to a claim. Choosing a higher deductible can sometimes lower your premium, but it also means more out-of-pocket cost if you need to file a claim. Lenders may have limits on how high a deductible they will accept relative to the coverage amount.

Specific coverage requirements, flood zone determinations, and premium amounts vary by lender, property, and insurer. Confirm requirements with your lender and insurance provider directly.

Common mistakes to avoid

Assuming required coverage should match the home's purchase price rather than rebuilding cost.
Not asking early whether a property is in a flood zone.
Choosing a deductible without checking whether the lender has limits.
Letting a policy lapse, which can trigger a lender-placed policy at a higher cost.
Not shopping around for homeowners insurance before closing.

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