You will be required to provide the lender with homeowner’s insurance that covers the construction of your home. That may be in the form of a so-called “builder's risk policy” or it may be a standard homeowner’s policy with additional coverage for construction.
If your project is a new build, it’s more likely you would get a builder’s risk policy. If your project is a rehab or addition, it’s more likely you will obtain a standard policy with construction coverage. You will need to decide what policy is best for you.
The amount and extent of your coverage is a decision you will have to make as well. Banks will typically require a minimum coverage based on either equal to or the lesser of:
The principal balance of the loan (including the amount of subordinate financing) as long as it equals the minimum amount – 80% of the insurable value of the improvements.
100% of the insurable value of the improvements as established by the proper insurer.