HO-6 Condo Insurance Required by Law by Lenders

HO-6 Condo Insurance Required by Law by Lenders

If you’re new to insuring your condo, the best way to think about it is that a condo/townhouse insurance (known as an HO-6)  is very similar to a renters’ or homeowners’ insurance policies, but with more extras. An HO-6 provides what is known as “walls in” or “studs in” coverage—essentially everything within the interior of the unit and personal property is covered by this policy.

What condo owners should be aware of is that HO-6 policies are now required by both lenders and by state law.

Required By Lenders?

The old model tended to be under the assumption that the master policies (from the HOA) covered all damages to the interior of the unit, as well as the property within (furniture, appliances, etc.). Under new Fannie Mae (FNMA) and Freddie Mac policies for condominium lending, lenders are now making an HO-6 policy as mandatory.

Essentially, borrowers must obtain an HO-6 condominium unit owners insurance policy unless the master policy provides interior/”walls-in” coverage. This coverage cannot be less than 20% of the assessed value for the interior. The reason for these changes is to limit the risk of insurers and lenders, especially since the recession-era and housing bubble of the late 2000s.

While this seems like common sense (lending and insurance go hand-in-hand), this wasn’t always the case. This caused more problems for condo owners, as many were under the impression that their master condominium insurance policy covered all of the damages in the interior (including furniture, appliances, etc.)  as well as the exterior. On the contrary, most master insurance policies cover common areas such as hallways, basement storage, boilers, walkways, and so forth—but NOT the inside of units. As you might imagine, in the event of a damages, lenders were at put at risk of owners defaulting on their loans, hence the changes.

What else has changed from the old ways?

• For condominiums with twenty or more units, fidelity insurance is now required. The reasoning behind this is to ensure that homeowners association funds are protected. While this requirement applies mainly to new projects, it is also being extended to established buildings.
• Homeowners associations must have 10% or more of their budgeting income designated in a capital reserve fund for replacement reserves, as well as income set aside for the insurance deductible.
• Underwriters will reject financing if the condominium/homeowners association are involved in litigation regarding the structural soundness, safety, and /or habitability of a project. However, a borrower may be eligible for a waiver if they can establish adequate insurance coverage for litigation, or little to no risk of loss to the condominium association.

However—and this is a BIG however—these insurance guidelines can be modified for condo/townhouse projects on a case-by-case basis, according to Fannie Mae. This means, therefore, that while these rules seem stringent, there may be some leeway for the insured.

What Do These Changes Mean to the Consumer?

If you’ve found these changes to narrow your ability to purchase a condo unit from a lender, you’re on the right track. Essentially, after the housing bubble collapsed, insurers and lenders had to eat the cost of defaulting loans, hastily-built homes, and other fallout from the scramble to take advantage of the market. Now it has become harder than ever to secure a loan for your dream condo unless you meet the new guidelines.

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As you can see, owning a condo has become more difficult in recent days. But it doesn’t have to be if you know the in’s and out’s of the insurance world. That’s where an insurance expert can come in handy. Contact the insurance advisors at RiskBlock to begin finding the best policies at the most affordable rates!