Below is an excerpt from B7-3-02, General Property Insurance Coverage (12/15/2021)
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, hurricane, civil commotion (including riots), smoke, hail, and damages caused by aircraft, vehicle, or explosion. Typhoon coverage is required for security properties located in Guam.
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.
For a first-lien 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.
See Servicing Guide, B-2-01, Property Insurance Applicable to All Property Types, for additional servicer responsibilities related to property insurance for second lien loans.
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 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.
The maximum allowable deductible for insurance covering a property (including common elements in a PUD, condo, or co-op project) securing a 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.
The table below provides references to the Announcements that have been issued that are related to this topic.