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B7-3-02, Property Insurance Requirements for One-to Four-Unit Properties (12/14/2022)

Introduction

This topic contains information on property insurance requirements for one- to four-unit properties, including:


Coverage Requirements

Property insurance policies for one- to four-unit properties securing loans purchased by Fannie Mae should be written on a "Special" coverage form or equivalent. At a minimum, the coverage must include the perils listed in the following table.

Required Perils
  Fire or lightning
  Explosion
  Windstorm (including named storms designated by the U.S. National Weather Service or the National Oceanic and Atmospheric Administration by a name or number)
  Hail
  Smoke
  Aircraft
  Vehicles
  Riot or civil commotion

If a property insurance policy excludes or limits coverage of any of the required perils, the borrower must obtain an acceptable stand-alone policy that provides adequate coverage for the limited or excluded peril (see  B7-3-05, Additional Insurance Requirements, for additional information).

The property insurance policy must provide for claims to be settled on a replacement cost basis. Property insurance policies that provide for claims to be settled on an actual cash value basis are not acceptable.

Additional requirements apply to properties with solar panels that are leased from or owned by a third party under a power purchase agreement or other similar arrangement. See  B2-3-04, Special Property Eligibility Considerations, for additional requirements.

See  B7-3-08, Mortgagee Clause, Named Insured, and Notice of Cancellation Requirements for additional requirements applicable to a one- to four-unit property.


Determining the Required Coverage Amount

The minimum required property insurance coverage amount for a first mortgage secured by a one- to four-unit property must be equal to the lesser of:

  • 100% of the replacement cost value of the improvements, or
  • the unpaid principal balance of the loan, provided it equals no less than 80% of the replacement cost value of the improvements.

The lender or servicer must verify the coverage amount is not less than the minimum required as described above, and the verification source may be the property insurer, an independent insurance risk specialist, or other professional with appropriate resources to make such a determination.

If the coverage amount does not meet the minimum required, coverage that does provide the minimum required amount must be obtained.

The following table provides the steps to calculate the amount of required property insurance coverage.

Step Description
1 Compare the replacement cost value of the improvements to the unpaid principal balance (UPB) of the loan.
1A

If the replacement cost value of the improvements is less than the UPB, the replacement cost value is the amount of coverage required.

1B

If the UPB of the loan is less than the replacement cost value of the improvements, go to Step 2.

2 Calculate 80% of the replacement cost value of the improvements.
2A

If the result of this calculation is equal to or less than the UPB of the loan, the UPB is the amount of coverage required.

2B

If the result of this calculation is greater than the UPB of the loan, this calculated figure is the amount of coverage required.

Note: When calculating the required amount of property insurance coverage, the loan amount must be used at origination and the UPB must be used during servicing of the loan.

Examples:

Category Property A Property B Property C
Replacement Cost Value $90,000 $100,000 $100,000
UPB $95,000 $90,000 $75,000
80% of the Replacement Cost Value $80,000 $80,000
Required Coverage $90,000 $90,000 $80,000
Calculation Method Step 1A Step 2A Step 2B

See Servicing Guide, B-2-01, Property Insurance Applicable to All Property Types, for additional servicer responsibilities related to property insurance for second mortgages.


Deductible Requirements

The maximum allowable deductible for all required property insurance perils for one-to four-unit properties is 5% of the property insurance coverage amount.

When a property insurance policy includes multiple deductibles, such as a separate deductible that applies to windstorms, or a separate deductible that applies to a specific property element such as the roof, the total amount for such deductibles applicable to a single occurrence must be no greater than 5% of the property insurance coverage amount.


Recent Related Announcements

The table below provides references to recently issued Announcements that are related to this topic.

Announcements Issue Date
Announcement SEL-2022-10 December 14, 2022
Announcement SEL-2021-11 December 15, 2021
Announcement SEL-2020-07 December 16, 2020

 

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