Olsen, 45, comes to the Dynamo with over 10 years of coaching experience including 113 victories in MLS.
"I am excited to join Houston Dynamo and contribute to the rich history of one of the great MLS clubs," Olsen said. "I was drawn to ownership's vision for the club, and I am confident in this new era for the Dynamo. We have a lot of work to do on the roster, game model, mentality and culture of the club, but I am energized and excited to get to work."
A D.C. United legend as a player, Olsen played for the club between 1998 and 2009, making over 200 appearances and winning the MLS Supporters Shield on three occasions in 1999, 2006 and 2007. He made 37 appearances for the United States national team.
He was also named MLS Coach of the Year in 2014, as D.C. had the best record in the Eastern Conference and reached the conference semifinals.
"The club is proud to welcome Ben Olsen to Houston as the head coach of the Dynamo," majority owner and chairman Ted Segal said. "Ben is one of the most accomplished coaches in MLS and brings championship experience, including winning eight different MLS titles as a player, to this position. His commitment to developing high-potential players and leading playoff contenders make him a great fit for the direction of our organization."