diff --git a/esphome/components/api/api_connection.cpp b/esphome/components/api/api_connection.cpp
index ea3268a583..ca5d3a97ba 100644
--- a/esphome/components/api/api_connection.cpp
+++ b/esphome/components/api/api_connection.cpp
@@ -1435,6 +1435,24 @@ bool APIConnection::try_send_log_message(int level, const char *tag, const char
   return this->send_buffer(buffer, SubscribeLogsResponse::MESSAGE_TYPE);
 }
 
+void APIConnection::complete_authentication_() {
+  // Early return if already authenticated
+  if (this->flags_.connection_state == static_cast<uint8_t>(ConnectionState::AUTHENTICATED)) {
+    return;
+  }
+
+  this->flags_.connection_state = static_cast<uint8_t>(ConnectionState::AUTHENTICATED);
+  ESP_LOGD(TAG, "%s connected", this->get_client_combined_info().c_str());
+#ifdef USE_API_CLIENT_CONNECTED_TRIGGER
+  this->parent_->get_client_connected_trigger()->trigger(this->client_info_, this->client_peername_);
+#endif
+#ifdef USE_HOMEASSISTANT_TIME
+  if (homeassistant::global_homeassistant_time != nullptr) {
+    this->send_time_request();
+  }
+#endif
+}
+
 HelloResponse APIConnection::hello(const HelloRequest &msg) {
   this->client_info_ = msg.client_info;
   this->client_peername_ = this->helper_->getpeername();
@@ -1450,7 +1468,14 @@ HelloResponse APIConnection::hello(const HelloRequest &msg) {
   resp.server_info = App.get_name() + " (esphome v" ESPHOME_VERSION ")";
   resp.name = App.get_name();
 
+#ifdef USE_API_PASSWORD
+  // Password required - wait for authentication
   this->flags_.connection_state = static_cast<uint8_t>(ConnectionState::CONNECTED);
+#else
+  // No password configured - auto-authenticate
+  this->complete_authentication_();
+#endif
+
   return resp;
 }
 ConnectResponse APIConnection::connect(const ConnectRequest &msg) {
@@ -1463,23 +1488,14 @@ ConnectResponse APIConnection::connect(const ConnectRequest &msg) {
   // bool invalid_password = 1;
   resp.invalid_password = !correct;
   if (correct) {
-    ESP_LOGD(TAG, "%s connected", this->get_client_combined_info().c_str());
-    this->flags_.connection_state = static_cast<uint8_t>(ConnectionState::AUTHENTICATED);
-#ifdef USE_API_CLIENT_CONNECTED_TRIGGER
-    this->parent_->get_client_connected_trigger()->trigger(this->client_info_, this->client_peername_);
-#endif
-#ifdef USE_HOMEASSISTANT_TIME
-    if (homeassistant::global_homeassistant_time != nullptr) {
-      this->send_time_request();
-    }
-#endif
+    this->complete_authentication_();
   }
   return resp;
 }
 DeviceInfoResponse APIConnection::device_info(const DeviceInfoRequest &msg) {
   DeviceInfoResponse resp{};
 #ifdef USE_API_PASSWORD
-  resp.uses_password = this->parent_->uses_password();
+  resp.uses_password = true;
 #else
   resp.uses_password = false;
 #endif
diff --git a/esphome/components/api/api_connection.h b/esphome/components/api/api_connection.h
index 0051a143de..0a3cb7b4d4 100644
--- a/esphome/components/api/api_connection.h
+++ b/esphome/components/api/api_connection.h
@@ -273,6 +273,9 @@ class APIConnection : public APIServerConnection {
   ProtoWriteBuffer allocate_batch_message_buffer(uint16_t size);
 
  protected:
+  // Helper function to handle authentication completion
+  void complete_authentication_();
+
   // Helper function to fill common entity info fields
   static void fill_entity_info_base(esphome::EntityBase *entity, InfoResponseProtoMessage &response) {
     // Set common fields that are shared by all entity types
diff --git a/esphome/components/api/api_server.cpp b/esphome/components/api/api_server.cpp
index f5be672c9a..5b87a773b5 100644
--- a/esphome/components/api/api_server.cpp
+++ b/esphome/components/api/api_server.cpp
@@ -219,8 +219,6 @@ void APIServer::dump_config() {
 }
 
 #ifdef USE_API_PASSWORD
-bool APIServer::uses_password() const { return !this->password_.empty(); }
-
 bool APIServer::check_password(const std::string &password) const {
   // depend only on input password length
   const char *a = this->password_.c_str();
diff --git a/esphome/components/api/api_server.h b/esphome/components/api/api_server.h
index f41064b62b..edbd289421 100644
--- a/esphome/components/api/api_server.h
+++ b/esphome/components/api/api_server.h
@@ -39,7 +39,6 @@ class APIServer : public Component, public Controller {
   bool teardown() override;
 #ifdef USE_API_PASSWORD
   bool check_password(const std::string &password) const;
-  bool uses_password() const;
   void set_password(const std::string &password);
 #endif
   void set_port(uint16_t port);
diff --git a/tests/integration/fixtures/host_mode_api_password.yaml b/tests/integration/fixtures/host_mode_api_password.yaml
new file mode 100644
index 0000000000..038b6871e0
--- /dev/null
+++ b/tests/integration/fixtures/host_mode_api_password.yaml
@@ -0,0 +1,14 @@
+esphome:
+  name: host-mode-api-password
+host:
+api:
+  password: "test_password_123"
+logger:
+  level: DEBUG
+# Test sensor to verify connection works
+sensor:
+  - platform: template
+    name: Test Sensor
+    id: test_sensor
+    lambda: return 42.0;
+    update_interval: 0.1s
diff --git a/tests/integration/test_host_mode_api_password.py b/tests/integration/test_host_mode_api_password.py
new file mode 100644
index 0000000000..098fc38142
--- /dev/null
+++ b/tests/integration/test_host_mode_api_password.py
@@ -0,0 +1,53 @@
+"""Integration test for API password authentication."""
+
+from __future__ import annotations
+
+import asyncio
+
+from aioesphomeapi import APIConnectionError
+import pytest
+
+from .types import APIClientConnectedFactory, RunCompiledFunction
+
+
+@pytest.mark.asyncio
+async def test_host_mode_api_password(
+    yaml_config: str,
+    run_compiled: RunCompiledFunction,
+    api_client_connected: APIClientConnectedFactory,
+) -> None:
+    """Test API authentication with password."""
+    async with run_compiled(yaml_config):
+        # Connect with correct password
+        async with api_client_connected(password="test_password_123") as client:
+            # Verify we can get device info
+            device_info = await client.device_info()
+            assert device_info is not None
+            assert device_info.uses_password is True
+            assert device_info.name == "host-mode-api-password"
+
+            # Subscribe to states to ensure authenticated connection works
+            loop = asyncio.get_running_loop()
+            state_future: asyncio.Future[bool] = loop.create_future()
+            states = {}
+
+            def on_state(state):
+                states[state.key] = state
+                if not state_future.done():
+                    state_future.set_result(True)
+
+            client.subscribe_states(on_state)
+
+            # Wait for at least one state with timeout
+            try:
+                await asyncio.wait_for(state_future, timeout=5.0)
+            except asyncio.TimeoutError:
+                pytest.fail("No states received within timeout")
+
+            # Should have received at least one state (the test sensor)
+            assert len(states) > 0
+
+        # Test with wrong password - should fail
+        with pytest.raises(APIConnectionError, match="Invalid password"):
+            async with api_client_connected(password="wrong_password"):
+                pass  # Should not reach here