Homeowners insurance is one of the last items on a first-time buyer's closing checklist, and one of the easiest to rush. Your lender will not fund the loan without proof of coverage, so many buyers accept the first quote that arrives a few days before closing. A little planning lets you choose coverage on purpose instead.
This guide covers what lenders require (using Fannie Mae's published standards as the benchmark), how escrow works, what a standard HO-3 policy includes, the decisions that move your premium most, and a timeline for shopping without delaying closing. The NAIC's latest figures show the average HO-3 homeowners policy cost $1,737 for a year of coverage in 2023, with wide variation by state and home value.
What your lender requires
Your mortgage is secured by the house, so the lender requires insurance that protects the structure. Exact rules come from the lender and investor. Fannie Mae, which buys a large share of U.S. mortgages, publishes its requirements in the Selling Guide. For one- to four-unit homes, they include:
- A policy written on a "special" coverage form or equivalent, covering at least perils such as fire or lightning, windstorm and hail, explosion, smoke, vehicles and riot.
- Coverage on a replacement cost basis, with an exception for roofs.
- A maximum deductible of 5 percent of the property insurance coverage amount, applied to each separate deductible such as a wind or hail deductible.
- An insurer that meets minimum financial strength ratings.
If the home is in a FEMA special flood hazard area and the loan is federally backed or regulated, the lender will also require flood insurance. Your lender's flood zone determination arrives during underwriting; ask for it early.
Escrow and force-placed insurance
Most first-time buyers pay insurance through an escrow account. The lender collects one-twelfth of the yearly premium (plus property taxes) with each mortgage payment and pays the insurer when the bill comes due. At closing you typically prepay the first year's premium and fund a cushion in escrow.
If your coverage lapses, the servicer can buy force-placed insurance and charge you for it. The Consumer Financial Protection Bureau notes it is usually more expensive than a policy you buy and generally protects only the lender. Under federal rules, the servicer must send a written notice at least 45 days before charging you for force-placed coverage, giving you time to provide proof of your own policy.
What a standard HO-3 policy includes
The HO-3 is the most common homeowners form. The NAIC reports it accounted for 79.5 percent of owner-occupied homeowners policies in 2023. Its coverages work like this:
| Coverage | What it protects | How the limit is usually set |
|---|---|---|
| A: Dwelling | The house and attached structures | Estimated cost to rebuild, not market value |
| B: Other structures | Detached garage, fence, shed | Often 10% of Coverage A |
| C: Personal property | Your belongings | Often 50% to 70% of Coverage A; adjustable |
| D: Loss of use | Extra living costs while the home is repaired | Often 20% to 30% of Coverage A |
| E: Personal liability | Injuries or damage you are legally responsible for | Commonly $100,000 to $500,000 |
| F: Medical payments | Small medical bills for guests, regardless of fault | Commonly $1,000 to $5,000 |
The dwelling is usually insured on an "open perils" basis, meaning everything is covered unless excluded, while belongings are insured against a list of named perils unless you upgrade. Flood, earthquake, earth movement, wear and tear, and sewer backup are typical exclusions. See our homeowners coverage guide for the full structure.
Setting the dwelling limit
The dwelling limit should reflect what it would cost to rebuild the home at today's labor and material prices, not what you paid. Land is not insured, and in many markets the purchase price includes a lot of land value. In others, especially for older homes with custom features, rebuilding can cost more than the sale price.
Ask each insurer how it estimated the rebuild cost and what features it assumed (square footage, roof type, finishes). Consider extended replacement cost, which adds a cushion, such as 25 percent above Coverage A, if construction costs surge after a regional disaster. Our guide to replacement cost vs. market value explains the difference in detail.
House features that move your premium
Insurers price your home's risk, not just your coverage. Factors you can check before you buy:
| Factor | Why it matters | What to do |
|---|---|---|
| Roof age and material | Older roofs raise premiums and may be covered on a depreciated schedule | Ask the seller for the roof's age and permits; get it in the inspection report |
| Claims history of the house | Prior water or fire claims can affect pricing and eligibility | Ask the seller for a CLUE (loss history) report, which they can request |
| Plumbing, electrical and heating | Older systems such as galvanized pipes or outdated panels can raise premiums or limit insurers | Note them in the inspection and ask insurers before closing |
| Distance to fire hydrant and station | Affects fire protection rating | Check the address with insurers early |
| Wildfire, wind, hail and flood exposure | Can trigger separate percentage deductibles or limited availability | Get quotes in the first week under contract |
| Pool, trampoline, certain dog breeds | Increase liability risk | Disclose them; consider higher liability or an umbrella |
Your own choices also move the price: the deductible, liability limit, replacement cost on belongings, bundling with auto, and protective devices such as monitored alarms or water shutoff valves.
Choosing deductibles you can afford
A deductible that is easy to absorb is part of being a resilient new homeowner. Remember that many policies carry two deductibles: an all-other-perils dollar amount such as $1,000 or $2,500, and in some regions a percentage wind or hail deductible based on the dwelling limit. On a $400,000 dwelling limit, a 2 percent wind deductible is $8,000. Fannie Mae's 5 percent cap would allow up to $20,000. Ask for both numbers in dollars before choosing. Our home deductible guide walks through the trade-offs.
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A shopping timeline that will not delay closing
- Right after your offer is accepted: request quotes from at least three insurers or an independent agent. Share the inspection findings once you have them.
- After the inspection: update quotes with roof age, system details and any repairs the seller agreed to.
- Two weeks before closing: choose a policy and send the insurer the lender's mortgagee clause (lender name and loan number) so the lender is listed on the policy.
- One week before closing: confirm the lender has the insurance binder or declarations page, and that the effective date is your closing date.
- At closing: verify the first-year premium and escrow cushion on your Closing Disclosure.
- After move-in: photograph every room for a home inventory, and set a reminder to review coverage each year before renewal.
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Questions readers ask
When do I need homeowners insurance when buying a house?
Before closing. The lender will ask for proof of a policy that starts on your closing date, usually in the form of a binder or declarations page listing the lender as mortgagee.
How much is homeowners insurance for a first-time buyer?
The NAIC's national average for the HO-3 form was $1,737 for 2023, but prices vary widely by state, home value, construction and claims risk. Get quotes as soon as you are under contract.
Is homeowners insurance included in my mortgage payment?
Often, through escrow. The lender collects it monthly and pays the insurer. You still choose the insurer and the coverage.
Does the seller's insurance cover the home until closing?
The seller's policy protects the seller's interest until ownership transfers. Your policy should start the day you close.
Do I need flood insurance?
Your lender will require it if the home is in a special flood hazard area and the loan is federally backed or regulated. Many buyers outside those zones buy it voluntarily because standard policies exclude flood.
Sources and further reading
Sources checked October 25, 2026. Figures are the latest published by each source at that date.
- Fannie Mae Selling Guide B7-3-02: Property insurance requirements for one- to four-unit properties
- NAIC homeowners report, data for 2023 (HO-3 average premium and market share)
- CFPB: Your mortgage servicer must comply with federal rules (force-placed insurance notices)
- 12 CFR 1024.37: Force-placed insurance (Regulation X)
- FloodSmart.gov: flood zones and the National Flood Insurance Program
General educational information, not advice for your situation. Policy wording, state law and the insurer's decision control actual coverage. Written and edited by K.R. Not reviewed by a licensed insurance agent; confirm details with a licensed professional or your insurer. Examples use hypothetical figures unless a source is named. Report a correction.
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