Fannie Mae Loan Guidelines and Insurance Requirements for Condo Owners Explained

Fannie Mae Loan Guidelines and Insurance Requirements for Condo Owners Explained

Since the last changes for Fannie Mae’s lenders guidelines in 2011, insuring your condo has been playing a larger role than before for those seeking a mortgage. As of 2016, the latest guidelines from Fannie Mae (which are still intact) state that condo owners need a number of policies in effect to ensure that the lender’s risk is mitigated. In this article, we’ll take a look at how condo owners can insure themselves to satisfy their mortgage requirements.

Fannie Mae’s Insurance Requirements

As a broad overview of Fannie Mae’s insurance requirements, here’s a sampling of what’s required for condo owners and HOA members:

• Property Insurance:  100% replacement cost coverage
• Directors and Officers Liability Insurance: There should be an adequate policy in place.
• Flood Insurance:  This is mandatory if the building is located within a flood plain
• Fidelity Bond/Crime Insurance: This policy is required for any building with 20 or more units. In addition, the coverage level must be:
  • at least equal to the sum of 3 months of HOA dues income
  • the aggregated amount in all reserve funds,
  • the highest deductible amount on other insurance policies.
• Management Company Insurance: If the HOA uses a management company, the management company must have comparable levels of coverage and name the HOA as an obligee.

For the individual condo owner, the most pertinent item to satisfying Fannie Mae’s guidelines is having adequate property insurance.

Property Insurance and Replacement Cost

Fannie Mae’s guidelines, while being a bit hard for non-professionals to sort out, essentially states that insurance must cover 100% of the replacement cost  of the condominium building’s improvements, which includes the individual units in the project.

Specifically, if the insurance policy includes any of the following coverage—either in the policy language or in endorsements to the policy—then this is acceptable to Fannie Mae’s specifications for loan eligibility:

• Guaranteed Replacement Cost–the insurer agrees to replace the insurable property regardless of the cost,
• Extended Replacement Cost–the insurer agrees to pay more than the property’s insurable replacement cost, or
• Replacement Cost–the insurer agrees to pay up to 100% of the property’s insurable replacement cost.

Check with an insurance advisor  to determine if your policy contains any of the aforementioned coverage types.

Policies with Coinsurance

Policies with coinsurance clause  can create additional risk for an HOA in the event of a loss, as the coinsurance will only cover a percentage (typically 80%) of a condo, leaving the HOA and/or condo owners to make up the remaining percentage .

There are a few solutions to this problem:

• If the HOA master property policy provides 100% replacement cost.
• If the policy that has a coinsurance clause also has an agreed amount endorsement or agreed value option (which waives the coinsurance requirement). However, the agreed amount must be no less than the estimated replacement cost.
• If the policy includes a coinsurance clause without the option of waiving the coinsurance provision, the policy may still eligible if there’s sufficient acceptable evidence to the lender that confirms that the amount of coverage is at least equal to 100% of the insurable replacement cost of the project improvements.

If you’re still confused by these terms (they’re not easy!), the essential idea to remember is that 100% replacement cost is required, no matter what the specifics of your policy entail.

Unit Owner Responsibility

Typically, adherence to these regulations requires unit owners to take responsibility to ensure that they’re properly insured. This requires both the proper insurances are in place from the condo board, as well as the unit owner must have their own HO-6 policy. Read more about unit owner HO-6 policies here.

A Real-World Example

There’s a bit of a conflict, however, when we apply these changes to the law and how they play out in reality. The truth is that most banks will want you to insure for the loan amount. For instance, in Manhattan, the market value  of a condo can be much larger than the replacement value.  Insurance companies only care about replacement value (i.e. construction materials).

For example, a $1mil condo in the Upper West Side (at market value, based on demand) may only require $100k in materials to replace.

This leads banks to disagree to preserve their own investment (the money loaned based on market value), which is almost always higher. In the past, Fannie Mae loans only required 20% of market value, which would be $200k in coverage in the previous example. Now with the most recent regulations being passed, there must be verified documentation of how insurers come up with 100% replacement cost.

What ends up happening is that the consumer is over-insured simply to fulfill the new requirements ($200k loan requirement vs. $100k replacement cost). Unless the cost of construction materials double in the near-future, this extra $100k of additional insurance coverage will be lost.

Check with Your Lender

Of course, the bank is ultimately the one calling the shots, as they’re the ones with the largest amount of risk. If you’ve begun to grasp the new concepts of the new Fannie Mae guidelines, you should also understand that your bank ultimately sets the terms of your loan. They may not be up to date on the new rules, which can cause problems down the road should an incident occur. As a consumer, you may be aware of the regulations, but emphasizing them to the lender may jeopardize your loan.

This is where having an insurance advisor can work on your behalf, arguing the new Fannie Mae regulations and informing higher-up staff in the bank to adhere to the current Fannie Mae requirements.

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RiskBlock provides our clients with replacement cost  reports by Marshall & Swift/Boeckh, an industry-standard company that provide accurate data in the construction and real estate industries. These reports can assure our clients that they are insured for 100% of the replacement cost.

If you’re wondering whether you have enough insurance to secure your mortgage on your new condo, contact the insurance advisors at Riskbock. Having an insurance expert by your side can ensure that your loan goes through without a hitch, as well informing your lender about the current regulations. This can save you money, give you peace of mind, and ultimately let you enjoy living in your condo worry-free.