Selling Guide

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B7-3-02, General Property Insurance Coverage (12/16/2014)

Introduction

This topic contains information on general property insurance coverage, including:

 

Coverage Requirements

Property insurance for properties securing loans delivered to Fannie Mae must protect against loss or damage from fire and other hazards covered by the standard extended coverage endorsement. The coverage must provide for claims to be settled on a replacement cost basis. Extended coverage must include, at a minimum, wind, civil commotion (including riots), smoke, hail, and damages caused by aircraft, vehicle, or explosion.

Fannie Mae does not accept property insurance policies that limit or exclude from coverage (in whole or in part) windstorm, hurricane, hail damages, or any other perils that normally are included under an extended coverage endorsement.

Lenders should advise borrowers that they may not obtain property insurance policies that include such limitations or exclusions, unless they are able to obtain a separate policy or endorsement from another commercial insurer that provides adequate coverage for the limited or excluded peril or from an insurance pool that the state has established to cover the limitations or exclusions.

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.

 

First Mortgages

For a first mortgage secured by a property on which an individually held insurance policy is maintained, Fannie Mae requires coverage equal to the lesser of the following:

  • 100% of the insurable value of the improvements, as established by the property insurer; or

  • the unpaid principal balance of the mortgage, as long as it at least equals the minimum amount—80% of the insurable value of the improvements—required to compensate for damage or loss on a replacement cost basis. If it does not, then coverage that does provide the minimum required amount must be obtained.

B7-3-03, Determining the Amount of Required Property Insurance Coverage provides a formula for determining the amount of property insurance coverage generally required for a first mortgage.

 

Second Lien Mortgages

When the existing coverage for a property that secures a second lien mortgage does not provide coverage equal to the lesser of 100% of the insurable value of the property improvements or the combined unpaid principal balance of the first and second mortgages (as long as that equals at least 80% of the insurable value of the improvements), the lender must require the borrower to obtain appropriate endorsements to bring the coverage in line with Fannie Mae’s requirements. A copy of any endorsements should be sent to the first mortgage servicer.

 

Construction-to-Permanent Mortgages

Property insurance coverage is not required for some construction-to-permanent mortgages that are covered by builder’s risk insurance during the construction period, although Fannie Mae’s standard property insurance requirements apply for construction-to-permanent mortgages as soon as the borrower occupies the property or the construction is completed.

Although the property insurance requirement for most home renovation or construction mortgage loans initially is based on the “as is” value of the property, the amount of coverage must be increased, if necessary, following the completion of the renovation or construction work to ensure that Fannie Mae’s standard coverage requirement is satisfied.

 

Deductible Amount

The maximum allowable deductible for insurance covering a property (including common elements in a PUD, condo, or co-op project) securing a first mortgage loan is 5% of the face amount of the policy. When a policy provides for a separate wind-loss deductible (either in the policy itself or in a separate endorsement), that deductible must be no greater than 5% of the face amount of the policy.

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