Before closing · Fannie Mae B7-3-01, B7-3-02Homeowners insurance requirements for a mortgage: what the policy must cover
The buyer chooses the insurance company, but the policy must meet the loan's rules. For a one- to four-unit home on a Fannie Mae loan, the policy should be written on a "Special" form or equivalent and cover at least fire or lightning, explosion, windstorm (including named storms), hail, smoke, aircraft, vehicles, and riot or civil commotion; if a peril is excluded, the buyer needs a separate policy for it. Coverage must be on a replacement cost basis – except roofs, which must be insured but not necessarily at replacement cost. The deductible for every required peril can be no more than 5% of the coverage amount, including separate wind or wildfire deductibles. The insurer must meet a minimum rating – for example AM Best "B" or better or Demotech "A" or better. If the lender cannot tell whether a policy meets the rules, the loan is not eligible.
What the policy needs (B7-3-02)
Perils
Fire or lightning, explosion, windstorm including named storms, hail, smoke, aircraft, vehicles, riot or civil commotion.
Replacement cost
The dwelling at replacement cost; roofs insured, but replacement cost not required.
Deductible
No more than 5% of the coverage amount – each separate wind or wildfire deductible too.
Excluded peril
A stand-alone policy for the excluded or limited peril.
Insurer ratings – one is enough (B7-3-01)
AM Best
"B" or better Financial Strength Rating.
Demotech
"A" or better Insurance Financial Stability Rating.
Kroll Bond Rating Agency
"BBB" or better Insurance Financial Strength Rating.
S&P Global
"BBB" or better Insurer Financial Strength Rating.
What the TC does
- Ask the buyer for the agent's quote early – in wind and wildfire areas, the deductible is often the problem.
- Send the insurance agent the lender's mortgagee clause and the loan number.
- Get the binder or declarations page to the lender before the Closing Disclosure is final.
- Flood insurance is a separate requirement in a flood zone.
Questions buyers ask
Can I choose my own homeowners insurance company?
Yes. The borrower has the right to select the insurer, as long as the insurance meets Fannie Mae's requirements (B7-3-01).
What is the maximum deductible a lender allows?
For a Fannie Mae loan on a 1–4 unit property, 5% of the property insurance coverage amount, for every required peril (B7-3-02).
Does the roof have to be insured at replacement cost?
No. The roof must be insured, but Fannie Mae does not require replacement cost for roofs (B7-3-02).
Related guides
ClosingCode lists the homeowner's insurance binder as a standard document on buyer-side deals and lets you request it by link – from the buyer, their agent or the insurance agent.
Start free trialSources: Fannie Mae Selling Guide B7-3-01 (12/14/2022) and B7-3-02 (08/05/2026), selling-guide.fanniemae.com, read October 25, 2026.
General information about Fannie Mae conventional loans, not legal, insurance or financial advice. Other loan programs and lenders have their own rules. ClosingCode is software; it is not a lender or insurer. This guide is not a substitute for the advice or services of an attorney.