FNMA is Requiring additional Insurance on Most Condos

This is a bit of old news that most are NOT aware of is new insurance requirements for condo projects

The end of 2008 FNMA came out with Announcement 2008-34. which touched on many condo issues. The one that will potentially affect ALL of us that sell or finance condominiums is: (straight from the announcement)

Hazard Insurance for Units in Attached Condominium Projects Including 2-4 Unit Projects

The Selling Guide, Part XII, Chapter 5, Insurance Requirements require that lenders verify that hazard insurance for all condominium projects with attached units, including two- to four- unit projects, covers fixtures, equipment, and other personal property inside individual units if they will be financed by the mortgage. The updated policy now requires that the borrower obtain a "walls-in" coverage policy (commonly known as HO-6 policy) unless the lender can document that the master policy provides the same interior unit coverage. The master policy must include replacement of improvements and betterment coverage to cover any improvements that the borrower may have made to the unit.

The HO-6 insurance policy must provide coverage in an amount that is no less than 20 percent of the condominium unit's appraised value. In the event such coverage can not be obtained, the lender should call the Fannie Mae Project Standards Department at the phone number listed at the end of this Announcement. The standard requirement for a 5 percent deductible applies.

In the past lenders did not require any interior coverage insurance at all, only relying on the associations master policy to "re build" the structure in the event of fire etc... I have always advised my clients to purchase additional insurance when buying a condo to at least cover their "stuff"and now Fannie is making this a requirement. This is significant because our buyers will need to purchase additional insurance up front just like when buying a single family home, they will also have an additional insurance payment that may reduce the amount of mortgage that they will qualify for. As a "Real World" example, I have a client closing today who has the coverage that costs $437/ year which is about $36/month. Not a lot, but when you consider the Association fee of $244/month already it adds up. At 6% interest rate the $36/month is $6,000 less you can borrow in your mortgage, the total $280/month is a whopping $46,000 less you can borrow.

There may be some light at the end of the tunnel: Some associations do have interior coverage, I have not found one yet... but I hear that they exist.

The FNMA guide has FAQ's and this is the most relevant one that I found on the subject... it addresses the why?

Why is Fannie Mae now requiring borrowers to purchase additional hazard insurance coverage ("walls-in coverage") beyond that provided by the association's Master Policy? Many states have passed legislation that limit what an association's Master Policy must cover. Because many Master Policies do not provide, or may be prohibited from providing, coverage that includes "improvements and betterments" in the unit, the borrower must obtain this coverage.

It has always been important to advise or clients to check to be sure that they had adequate insurance, now Fannie has forced the issue, which in hind site is a good thing for our buyers, but it is an additional layer of expense to consider when comparing a single family home to a condo.

Knowledge is power, Make sure your clients are aware of the difference so they can make an informed decision. There has always been a miss conception that it is cheaper to buy a condo than a home, but consider the Association fee and the additional insurance into the mix, and your client may be able to afford a more expensive single family home.

Have a great week.

Rob

Robert Rauf

Mortgage Banker

www.RobertRaufHomeLoans.com or my blog: http://activerain.com/blogs/rrauf

(732)223-1630 x102

Since 1987 I have been helping my clients fulfill their dream of home ownership!

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