Many borrowers want to know how much home insurance their lender actually requires. They are concerned that the wrong coverage amount may affect their home loan review. This guide explains what lenders may look for so you can move forward with confidence.
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How Much Home Insurance Does Your Lender Require?
SHORT ANSWER
Your lender requires enough coverage to rebuild the home, not to match what you paid. The standard is the lesser of full replacement cost or your loan balance, provided that balance covers at least 80% of replacement cost. Your policy also has to pay claims at replacement cost rather than depreciated value. Smart Loan Savings Educational Content
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| Home Insurance Requirement Factor | Lender Rule |
|---|---|
| Home insurance your lender requires | Enough to rebuild the home |
| What home insurance does not track | What you paid for the home |
| The lender’s coverage amount test | The lesser of 2 amounts |
| Minimum coverage share of rebuild cost | 80% |
| How your home insurance pays claims | At replacement cost |
| Depreciated payouts on the dwelling | Not accepted |
| Depreciated payouts on the roof | Accepted since 2026 |
| Maximum home insurance deductible | 5% of the coverage amount |
| Separate wind and roof deductibles | Capped at 5% combined |
| Home insurance policy type lenders want | One covering all but named exclusions |
| Risks your home insurance has to cover | 8, including fire, wind, and hail |
| A policy missing a required risk | Needs a second policy |
| Who verifies your home insurance amount | Your lender or servicer |
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| Home Insurance Requirement Deep Dive | Underwriting Impact on Your Home Loan Profile |
|---|---|
| Your Lender Insures the Rebuild, Not the Purchase | The common mistake is insuring a home for what you paid. Your lender does not care about the purchase price. It cares about what rebuilding the structure would cost, which is a different number entirely. Land carries no rebuild cost. So a $400,000 purchase on an expensive lot might only need $250,000 of coverage. In a high construction cost area the reverse happens, and the rebuild figure exceeds what you paid. |
| The Lesser-Of Test, Worked Through | The rule is the lesser of 2 numbers. One is 100% of the replacement cost of the structure. The other is your loan balance, but only if that balance covers at least 80% of replacement cost. Take a home costing $100,000 to rebuild with a $90,000 loan. 80% of $100,000 is $80,000. Your loan exceeds that, so $90,000 is the required coverage. Drop the loan to $75,000 and it falls below the 80% floor. The floor applies instead, and $80,000 becomes the requirement. |
| Depreciated Payouts Do Not Qualify | Your policy has to settle claims at replacement cost. A policy that pays actual cash value, meaning the depreciated worth of what was damaged, does not meet the requirement. Neither does one that limits, depreciates or reduces a payout by any other route. That is why a cheaper policy can fail underwriting even when the coverage amount looks right on paper. Your mortgagee clause puts your lender on the policy, and the settlement basis is what they check. |
| The Roof Exception Is New | One part of that rule changed in 2026. Federal regulators announced in March that Fannie Mae and Freddie Mac would begin accepting actual cash value coverage on roofs for single-family homes and condos. The rest of the house requires replacement cost. The change matters because insurers had been moving older roofs to depreciated coverage at renewal, and homeowners were caught between a carrier that would not write replacement cost and a lender that would not accept anything else. |
| A Deductible Can Be Too High to Close | There is a ceiling on your deductible. The maximum for required coverage is 5% of your total coverage amount. On $300,000 of coverage that is $15,000. The rule reaches further than people expect. If your policy carries a separate windstorm deductible, or a separate deductible just for the roof, the combined total for a single event cannot exceed 5% either. Raising a deductible to lower a premium can quietly break the requirement. What Is Mortgage Escrow? explains how the annual premium becomes a monthly amount. |
| Eight Risks, and What Happens If One Is Missing | Your policy has to cover 8 specific risks. Fire or lightning, explosion, windstorm including named storms, hail, smoke, aircraft, vehicles, and riot or civil commotion. Lenders want a policy that covers everything except what it explicitly excludes, rather than one that only covers a listed set. If your policy excludes or limits any of those 8, you have to buy a separate policy covering that risk. In wind and hail regions, a windstorm exclusion is the one that most often forces a second policy. |
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| What Lenders Check | How Insurance Requirements Affect Your Loan File |
|---|---|
| The Coverage Amount Against Rebuild Cost | Your lender compares your coverage to the replacement cost of the structure and to your loan balance. Coverage below the required figure has to be increased before closing. |
| How the Policy Settles a Claim | The policy has to pay replacement cost on the dwelling. A policy that depreciates the payout does not qualify, whatever the coverage amount says. |
| Every Deductible on the Policy | The deductible cannot exceed 5% of the coverage amount, and separate wind or roof deductibles count toward the same ceiling. A high deductible chosen to cut the premium can stop the file. |
| Whether a Required Risk Is Excluded | A policy that excludes windstorm, hail or another required risk needs a separate policy covering it. That second policy has to be in place before closing. |
| The Source of the Rebuild Figure | Your lender verifies replacement cost through the insurer, a replacement cost estimator, or an insurance risk appraisal. A figure you estimated yourself is not the basis. |
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| People Also Ask | Why These Questions Matter |
|---|---|
| Should you insure your home for replacement cost or market value? | Lenders require coverage based on what rebuilding the structure would cost, not on the purchase price or market value. Land carries no rebuild cost. A home on an expensive lot often needs less coverage than the price suggests, and your insurer or a replacement cost estimator supplies the figure. |
| Can your home insurance deductible be too high for a mortgage? | The deductible on required coverage cannot exceed 5% of the total coverage amount. Separate deductibles for windstorm or for the roof count toward that same 5% ceiling when they apply to a single event. On $300,000 of coverage, the ceiling is $15,000. |
| Will a lender accept actual cash value coverage on a roof? | Federal regulators began allowing actual cash value coverage on roofs for single-family homes and condos in March 2026. The rest of the house has to carry replacement cost coverage. The change helps homeowners whose insurer moved an older roof to depreciated coverage at renewal. |
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| Sources Used on This Page |
| Fannie Mae Selling Guide, B7-3-02, Property Insurance Requirements for One-to Four-Unit Properties — the required coverage form and the 8 required perils, the requirement for a separate policy where a peril is excluded, the replacement cost settlement requirement, the coverage amount calculation and its worked examples, the sources acceptable for verifying replacement cost, and the 5% deductible ceiling including combined deductibles | Federal Housing Finance Agency — March 2026 announcement that Fannie Mae and Freddie Mac would accept actual cash value coverage on roofs for single-family homes and condos |
| Last Verified July 2026 |
| The roof change was announced in March 2026 and the underlying Selling Guide topic still carries its earlier revision date, so published guidance may lag the current rule. Insurance requirements are set by the loan program and by your lender, and both can change. |
| Disclaimer |
| These requirements apply to conventional loans purchased by Fannie Mae. FHA, VA and USDA loans set their own insurance requirements, and individual lenders may apply stricter rules. What a specific policy covers is set by that policy. This page is provided for educational purposes only. Smart Loan Savings Educational Content |